Category: Taxes

There has been plenty of negative news coverage around fewer refunds being issued this year, compared to last year. The IRS reports that the average refund is down 27%. The likely reason is that the IRS published updated tables when tax reform was passed which resulted in workers receiving an immediate increase in take home pay as employers withheld less in taxes. Other families will pay more in taxes but it will all depend on your age, income, size of family, real estate assets, the trade you work in, and type of business structure – LLC, partnership, or corporation.

The big winners for this tax cut are those retirees that have no mortgage debt, pay low state taxes, and have limited income. The reason is many retirees don’t carry a mortgage and don’t itemize their deductions.  They will be helped by the doubling in their standard deduction. Below is a table of the changes to the standard deduction for all taxpayers.

Also, there is an additional standard deduction if you are over 65 – $1,600 per individual and $2,600 per couple. Social Security benefit taxes will likely be lower given adjusted gross income falling.

All taxpayers will benefit from the change in lower tax brackets. If you are in the higher marginal tax bracket, you will likely benefit from these lower rates.  The graph below created by Fidelity Investments does a great job of illustrating the change in marginal tax rates. Notice the widening of the tax bracket, which will lower the taxes for the upper to middle class.

However, those that make the most income might not fully benefit from the lower marginal tax rates. They will pay more because they can no longer deduct state and local taxes (SALT), which was capped at $10,000. This property tax cap hit homeowners who live on the coasts in higher tax states such as New York, New Jersey, and California. These taxpayers are now more likely to take the higher standard deduction and the mortgage interest deduction will no longer matter. So even though they are benefiting from lower marginal tax rates, they are most likely still paying more in taxes. High earnings will also pay more because the Social Security income tax cap increased from $128,400 to $132,900.

The new tax rules will not be as beneficial for larger families.  Personal exemptions of $4,050 per family member were eliminated. However, the child credit was increased from $1,000 to $2,000 per qualified child under the age of 17. Most families were much better off with the higher personal exemptions.

I’ve spoken to a number of clients that will be paying more in taxes this year.  Most of these clients in the past itemized their taxes because of large mortgages and higher real estate taxes. I expect that many families will be surprised by a lower refund this year. If they want a larger refund, they might adjust their tax withholding so that more taxes are withheld next year.

It will be interesting to see how lower refunds will impact the economy in the next few months. In the past, many families used their large refund checks to go on vacations, save for college, or go car shopping.  With these checks being lower, it will be interesting to see if there is any drop in consumer spending in the coming months.

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