Okay, last week I posted a blog from a year ago when I warned of the potential tax situation for your 2018 liability. I know many of you have seen and read about people getting smaller refunds this year when compared to previous years. To get an idea of what is happening with 2018 refunds to take a look at this NPR article on the subject https://www.npr.org/2019/02/14/693976808/anger-confusion-over-dwindling-refunds-is-trumps-tax-plan-to-blame. But do smaller refunds mean more in taxes? That is the real issue when it comes to the refund situation. This is where a financial planner will come in extremely handy to get on top of your 2019 tax liability situation.
The way this works is you have steady withholdings of certain taxes from your paycheck. These taxes are then accumulated throughout the year to pay your tax liability when you file in the following year. The problem with last year is that when the new tax law went into effect, the IRS released its tax table that told employers what to withhold from their employee’s paychecks. And here is part of the issue with the new tax law, the tables in most cases under withheld income taxes from your paychecks. In some cases, this leads to people having to pay in the underpayments with a check to the IRS when they file their 2018 taxes. And these under withholdings are what is also leading to the smaller refunds.
Taxes and Refunds
Now I hate to admit that any politician is correct about anything as I think they are all completely worthless when it comes to an understanding the average citizen, but there was one that was spot on when he stated smaller refunds do not necessarily mean you paid more in taxes. Here is what he had to say on the subject, https://finance.yahoo.com/news/tax-refund-not-taxes-owed-grassley-143538312.html. Okay, let’s think about what this means for you and your 2018 tax liability and how a smaller refund may not mean you paid more in taxes.
A refund means you have overpaid the IRS throughout the year through your withholdings for your taxes. That means you have provided the government an interest-free loan for the year and all the refund means is you are getting back what you overpaid in taxes and that money is yours in the first place. The new tax withholding tables took less out of your paycheck in taxes meaning your interest-free loan to the government was smaller, meaning your refund will be smaller. Not providing the government an interest-free loan is a good thing but not when you rely on that refund as an “unofficial” savings account and your refund is something you have come to rely on to help out financially.
So, the good senator is correct in stating that smaller refunds do not automatically mean you paid more in taxes; it just means you paid in less to the government over the year. But what he does not go into is the fact that these new tax tables under withheld people’s taxes by significant amounts. And because of this many people are finding out that they owe the government money when they complete their 2018 taxes and are cutting checks to the IRS. Does this mean you are paying more in taxes? Not necessarily but it might. In order to know that you will have to compare what you paid in 2017 to what you were paying in 2018, in many cases, the difference is negligible and not much of a real difference, but in some cases, people are indeed paying more in taxes for 2018.
Real Life Taxes
To give you a real-life example I will use my tax situation to help explain this a little more. For 2018 my wife and I had our W-4’s as follows. On mine, it was married with two exemptions and my wife was single and zero exemptions claimed. Throughout the year, I made four equal payments of $410 for a total of extra tax payments of $1,640 throughout 2018. I have completed our taxes, and even with the extra payments, we had to write a check to the IRS for an additional $234. Had I not calculated what our potential tax liability would have been in early February of last year we would have had to pay the IRS almost $1,850 this year when we had, in theory, a solid plan on our W-4’s with our employers.
So, my wife started a new job that pays about the same as the one she had in 2018, and again I placed the numbers in a spreadsheet to see what our 2019 tax liability would be as we are in the 22% tax bracket with our combined salaries. We also use the same exemptions on our W-4, and next year we would owe the IRS almost $8,000 due to under withholdings due to these terrible IRS tables.
Now I do not mind owing a small amount to the IRS at the end of the year and really would rather not get a refund but getting hit with an $8,000 tax bill would have been a complete shock and could have posed a real hardship on us. So, the first thing I did was change my W-4 to single with one exemption and will revisit our tax liability after my next paycheck to see how much that will reduce the $8,000 we will owe next year in addition to what we have paid in through payroll deductions. And if I have to, I will adjust it yet again for the next paycheck until I get the amount we owe at the end of the year close to zero.
Now regardless of where you live, if you think you need help feel free to make an appointment with me to go over your tax liability situation for a small fee. I provide a free 15-minute consultation and charge small fees for anything over the first 15 minutes, and you can make an appointment at https://www.calendly.com/kgmeyer. For those in or around Nashville contact me directly, and we can arrange a time to meet and discuss your taxes or any of your financial planning needs.
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