You may have seen people grumbling on social media about smaller tax refunds this year. Major media outlets (NY Times, USA Today, Washington Post, etc.) are reporting the average tax refund check is lower this year. Many think the tax reform act of 2017 wasn’t that great. Some even think taxes are higher for the average American. However, this isn’t the case.
Although you may not get as much back from the government this year, it’s probably because your tax savings were in your paycheck throughout the year. Remember a tax refund simply means you overpaid the IRS. Now the IRS says “thanks for the interest-free loan” and repays you. When you pay taxes correctly, you only pay what you owe during the year. This results in a zero balance. In other words, you don’t receive a refund, and you don’t owe anything either.
Standard Deduction vs. Itemized Deduction
One of the things you hear about is standardized deductions versus itemized deductions. If you have eligible expenses that you can deduct, you should tally them up. This includes things like mortgage interest, charitable contributions, some medical expenses above a percentage of your income, etc. Then compare your final figure against the standard deduction. You get the better of the two.
There are a few things you can no longer deduct. This includes unreimbursed employee expenses, tax preparation fees, investment expenses, job search expenses, hobby expenses, and safe deposit box fees.
Other changes in itemized deductions include:
- State and local taxes (SALT) is capped at a $10,000 per year deduction.
- Interest for a new mortgage over $750,000 is no longer deductible. (This doesn’t impact most Americans.)
- Some casualty losses like property loss from fire, storm, theft, etc. not reimbursed by insurance are no longer deductible.
Smaller Tax Refunds
Despite these changes, your taxes should be a little lower when compared to the last 4-5 years. Those who usually receive a refund and didn’t adjust withholding during 2018, you probably will see smaller tax refunds.
As I’m sure you realize, tax laws are very complex. I encourage you to speak with your tax professional or CPA about specific questions, and how the new code impacts your individual situation. In the meantime, feel free to look at the differences between 2018 and 2019 calculations here.