Many of our clients, as well as millions of others across the nation, were shocked, angered, confused, etc. as to why their refunds dropped so drastically from 2017 to 2018. Most clients pointed to the fact that the married standard deduction had been increased from $12000 to $24000 and they were excited. They pointed out the fact that the child tax credit had been increased from $1000 to $2000 per child and they were excited. They pointed out the fact that tax rates across the board had been reduced. Even though it was a very small amount, clients believed it should make a big difference in their eyes, and they were excited.
But, like I have always said, major retailers only “advertise” items on sale. They don’t advertise items that prices were raised on. Major retailers are big business. Just like the government/IRS are the biggest businesses in the world.
So lets delve into the “sale” items as well as the price increases of the new tax laws from 2017 to 2018. There were several changes, but we will discuss the 3 that we saw the most issues with.
First, the standard deduction for married couples did indeed increase from $12000 to $24000. That is entirely true. That was advertised. What wasn’t advertised was the fact that one entire area of the itemized form had been deleted. No longer can an employee deduct union dues, tax prep free, required training, required education, tools, travel, motel stays, mileage, uniforms, or any other employee business expenses. We have many married couples that work very well paid jobs and they incurred thousands of dollars each in deductions in this area. This loss of these deductions affected so many trades such as construction workers, sales persons, nurses, mechanics, and many others.
So, an average client tax return in our office, with a married couple that had these types of deductions, and they had a 3% tax reduction from 2017 to 2018, they still ended up in the 22% tax bracket of their top tier income. If they could no longer itemize deductions, the change from $12000 to $24000 standard deduction saves them $2640. However, the previous year they had $39000 in itemized deductions (which was typical), they lost $3300. They gained absolutely nothing. They lost $660 overall.
Another smaller itemized snafu was in the tax area of the form. For the few clients who could still itemize, it was made even tougher. In 2017, a couple had state tax withholding of $6375, property taxes of $3550, vacation home property taxes of $1675, personal taxes of $810, and license plates fees of $550 for a total deduction of $12960. For 2018, this was limited to a $10000 total deduction. So another loss of $650. Small amount, but they add up.
The second area of concern was the child tax credit. Yes it was increased from $1000 per child in 2017 to $2000 per child in 2018. That was advertised. What wasn’t advertised was the fact that they took away the $4050 per exemption deduction. A family of 5 with 3 children under 17 saved $3000 due to the additional child tax credit. However, by losing a total of $20250 in exemptions, in the 22% tax bracket, they gained $4455 in their total tax bill. Once again, they gained nothing. They lost another $1155 overall.
The last area was probably hidden the best of all. Yes there was a 3% tax cut. However, this 3% tax cut was calculated on income after all deductions. Remember, our example couple makes $150000 total income, they have 3 children, they lost $15000 in itemized deductions and $20250 in exemptions. In reality, this couple did pay 3% less tax on their top tier income, but paid an additional 22% tax on $35250 more income in 2018 than in 2017. They saved at most $2725 due to the 3% tax reduction, but they were billed an additional $7755 in tax due to lost deductions. And remember, they received an additional $3000 for the increased child tax credit. This results in at least another $2000 lost refund overall.
But the IRS still wasn’t convinced it had succeeded in wiping out your refunds. Remember that 3% tax reduction? It was great. But the IRS released new withholding charts. You had less withheld. You had a few more dollars in your check each week. Guaranteed, you did not see it. We checked approximately 500 clients check stubs from both years as well as compared their W-2 forms for both years. Almost unanimously, there was approximately 5% less withheld per $75000. Go figure. You will pay 3% less in taxes, but you had 5% less withheld. Need help? That’s maximum $2250 less tax liability, but $3750 less in withholding. Wow. You just went $1500 further in the hole due to these tax cuts. That’s $1500 EACH spouse.
All these advertised “sale items” factored in with the unadvertised price increase items really does explain why we had so many displeased clients. It explains why literally hundreds of clients saw 2017’s refunds at $6600 and 2018 at $600. Or $3000 refunds to owing $2000. Or a $10000 refund down to $3000. And on and on and on.
I hope to post a video on here soon showing a quick whiteboard completion of a column of what this type of return looked like in 2017, a column showing what the IRS wanted you to see for 2018, and a column that shows the aforementioned “in reality” tax return for 2018.
Want to know more? Give us a call and ask us for further details.
