Did Your Taxes Go Up?

As much as I enjoy hearing Trump supporters enraged that their taxes went up under the new tax laws, most of the time the people complaining have no idea whether or not their taxes actually went up or down; all they know is how their refund changed. Looking at the size of a tax refund as a yardstick to determine what your taxes were is flawed - it's one indicator, and can be a good one if absolutely nothing changed, but there's more to it.

First of all, the money you get back after filing your taxes is a refund, it's not a return. Your tax return is the form you fill out every year: a 1040, or a 1040A or 1040EZ. But that's only the tip of the misunderstanding iceberg. A refund represents the difference between what the tax on your income (technically your taxable income) was and what you paid in during the year, either via payroll withholding or estimated payments. If you receive a refund you have let the government take more than what they were entitled by law to take; in affect, an interest-free loan. Personally I'd much rather have an extra $100 after taxes in my pocket every month than receive a $1200 refund, however I do understand that, for some people, money management is easier if they don't have that cash available every month. It gives the illusion that you're getting some kind of bonus, but it's only an illusion!

In previous years, if your income remained somewhat stable and you had the same number of personal exemptions, a refund could be a fairly accurate way to gauge whether you were better off or worse, however this year was the first year of the new tax laws. The brackets changed, the rates changed,the standard deduction went up, personal exemptions went away, withholding amounts changed, not to mention changes in what could be deducted. The only way to know for sure if your actual tax burden increased was to look at the line that tells you what your tax was. (The line number varies depending on what form you use) You then have to do some work. If your circumstances are identical to 2017 you can just look at the "your tax" line from last year. If there were some changes, you might have to plug this year's income into last year's tax form and see what the difference is.

For example, I don't get a refund, since I have a small business where I don't pay taxes up front. This year I have to write a check for about $200 more than I did last year. Did my taxes go up? Not so fast! My income was higher than last year, my withholding was lower, plus all the tax changes. What I did was take a 2017 1040 and enter all my 2018 information, then compare my 2018 figures under the old and the new laws. As it turned out, under the new law my tax liability was about $300 less than what it would have been under the old law. If all I had done was look at the check that I had to write, I'd have assumed that I had gotten screwed by the new law.

Was I surprised? Not at all, since all the information that I needed to estimate how my taxes would change under the new law was available last year: tax rates, brackets, etc. Anyone could have done the math and come pretty close in estimating how the changes would affect them, especially for people with relatively simple finances.

I think fewer people came out worse off under the new law than think that they did.