OMG! You heard on the news that average refunds are lower this year! That the new tax law is actually hurting the middle class! That your taxes are going up! Weren’t we promised lower taxes?!
OK, deep breath… The drive-by media is good at reporting the who, what, and when, but they aren’t so good at the why and the how come? Are the rumors true? Yes and no. Yes, we are finding that refunds are generally smaller this year. No, working families are not paying higher taxes; in fact, they’re paying less taxes – it just doesn’t FEEL that way when your refund is smaller.
Wait, what!? My refund is smaller than last year?! Yep, leave it to our government to confuse things. The new tax law lowered taxes for about 90% of Americans. The biggest savings is going to middle class working families. But Congress wanted you to know how wonderful they were and also get money into the economy, so back in February 2018, they changed the withholding tables. You may have noticed more money in your paycheck.
Fast forward to this tax season: people ARE paying less in taxes, but that extra amount in your paycheck means your refunds are lower than prior years and some people are having to pay for the first time. This is especially true for families earning $150,000 or more on W2’s ☹
TMI – What, what?! Here’s how income taxes really work for W2 wage earners. Every paycheck your employer withholds money for federal taxes, Social Security, Medicare, state taxes, and other things based on a W4 form they had you complete. The tax money goes into an account with your name and SSN and sits there until you file taxes. Your total tax for the year is computed based on your income, adjustments, and deductions. THEN, the amount set aside from your paychecks is subtracted from your tax owed, and if more was withheld than owed, you’ll get a refund; otherwise, you’ll have to pay. (OK, it’s not quite that simple but that’s the basics).
Please pass this and any of my tax blog posts on to whoever you like. There is way too much misinformation about taxes flying around.
So there you have it. Please feel free to call or email our office if you have any questions or concerns or just need to vent a bit.