Taxes. It’s one of the two things that are certain in life, according to Benjamin Franklin. He would know. As a founding father, he signed the United States Constitution that established taxing power in the very first Article! Benjamin Franklin died as an old man, but the tax system has lived on now for over 230 years. Changes in our tax code due to the 2017 Tax Cuts and Jobs Act (TCJA) combined with the failure to adapt quickly to those changes have the media in a frenzy, and some Americans confused.
It is misleading to portray the TCJA as the main culprit negatively affecting most American taxpayers through lower tax refunds or a surprise tax bill. The size of a tax refund or tax bill is a signal of how much you withheld throughout the year, not the amount of taxes you owe.
To judge how the TCJA affected your overall tax situation you have to compare your total tax year over year. Look at your total tax from 2017 (form 1040 line 63) and 2018 (form 1040 line 15). You will probably find your tax bill has gone down. An analysis done by the Tax Policy Center suggests that “two-thirds [of American taxpayers] will get a tax cut, and a small percent – 8 or 10 – will get a tax increase.”1 Your earnings must be relatively similar year over year to make this comparison worthwhile.
The major culprit of smaller tax refunds or suddenly owing taxes was a failure by most Americans to adjust their withholdings. As a result, taxpayers withheld less money for taxes and paychecks were higher throughout the year.
Although it’s too late to fix your tax bill for 2018, you can make changes now for 2019’s. Use the IRS’s Tax Withholding Calculator to see how many allowances you should take and double check with your employer to make sure they have the right amount on file. If you need to make a change, file a new W-4 with your employer.