What You Need to Know About Your Tax Refund This Year

Heritage Explains

What You Need to Know About Your Tax Refund This Year

Learn exactly what changed under the Tax Cuts and Jobs Act and why it's best for you to keep your money through-out the year and not wait for the government to pay you back later.

This week on the "Heritage Explains" podcast, Adam Michel, a senior Policy Analyst, in Heritage’s Grover M. Hermann Center for the Federal Budget, walks us through what your refund check really is and why it has nothing to do with President Trump’s tax cuts. The specific ways in which the tax laws truly did change for the better. And how we can help Americans understand that allowing the government to hold your money and pay you back later is not in your best interest.

MICHELLE CORDERO: Fact. The amount of your tax refund has nothing to do with how big your tax cut was. But if you've watched the news lately, you wouldn't know that.

NBC NEWS: Tax season 2019 and tonight some early returns suggest many Americans won't be getting the refunds they expect, and could even owe money to the IRS. Already some early filers have lashed out at president Trump on Twitter. I just did my taxes and made the same as last year. I owe four thousand more. I voted for Trump, but will not be next election. Worst tax return I had in a decade, and I won't vote for you again, especially after I started on my 2018 return.

MICHAEL STRAHAN: The growing anger over shrinking tax refunds is the first tax season since president Trump's new plan went into effect, and people are flocking to social media to complain they're not getting back as much money as last year. Rebecca Jarvis is here with more, Rebecca, what is behind this?

REBECCA JARVIS: Good morning Michael, it's good to see you. Yeah, most look forward to that refund check, some even rely on it, but so far this year many of those who've received tax refunds in the past aren't getting them and some are even having to pay extra.

ALI VELSHI: Tax day's just one week from today, and this year marks the first time Americans are filing taxes under the tax reform plan that president Trump made law in December of 2017, which made significant changes to rates and deductions. The president promised that most people would see a tax cut, so how are folks feeling about it? Well, a new NBC poll says 28% of respondents think they'll ultimately pay more in taxes, only 17% think they're going to pay less.

CORDERO: This idea, that president Trump and his new tax policy was responsible for Americans owing more or receiving less in their refund. This is the way the media has written their headlines and started their news segments. They've profiled working class Americans who had important bills that needed to be paid with their refund check, and were disappointed that they weren't able to do so. What I find interesting and irresponsible is that this isn't how the media has been ending their segments. Listen to how Michael Strahan ended this segment on Good Morning America, with Rebecca Jarvis, ABC's chief business and technology and economics correspondent.

STRAHAN: Okay so reality check. 80% of Americans received their tax cut, why are refunds smaller?

JARVIS: So, basically in those paychecks, people got a little bit more. Think about it like this. If you got forty dollars extra in your paycheck each week, that would be about a thousand dollars more over the course of a year, instead of seeing it in the refund check, you got it in the paycheck but you might not have noticed it along the way.

CORDERO: Yep, that's right. The confusion about what lower refunds mean is an unfortunate consequence of the withholding system. Withholding sort of takes the sting out of paying taxes, by masking how much you're actually paying. That's because you never see it get taken out. Your employer does it for you.

Again, here is how MSNBC ended their deep-dive into tax season. After a long segment of gripes and profiles of upset Americans, this is what Ali Velshi, and NBC's technology correspondent Jake Ward had to say in the final minute of their report.

JAKE WARD: It's almost as if the inefficiency of the system has really been serving people's purposes-

VELSHI: Right. Because it is inefficient to have the government have your money instead of you have your money and doing whatever you want with it. That's right.

WARD: If you were, for instance, going to say or going to invest it, you'd probably do better than having it sit with the government.

VELSHI: I don't often agree with Donald Trump Jr., but in this case that is exactly what, he's right about that.

WARD: Right. This particular case he's right.

VELSHI: That's right, that's right.

CORDERO: Meanwhile, amidst the misleading news coverage, more polls are finding that a majority of Americans don't even believe that they got a tax cut. Despite the fact that both sides of the aisle admit that we're home more money in our paychecks.

Today, Adam Michel, a senior policy analyst in Heritage's Grover M. Hermann Center, for the federal budget walks us through what your refund check really is, and why it has nothing to do with Trump's tax cuts. The specific ways in which the tax laws truly did change for the better and how we can help Americans understand that allowing the government to hold your money and pay you back later, is not in your best interest.

Adam, from a really 101 perspective, can you explain to me what exactly are our tax refunds?

ADAM MICHEL: That's a great question that a lot of Americans are having right now. A tax refund is just the government paying you back money, if you overpaid your taxes throughout the year. What's important to remember is that your tax refund has nothing to do with how big your tax cut was. This is simply just an adjustment at the end of the year. Either you owe the government money, or they owe you money, it's really as simple as that.

CORDERO: Yeah. I've definitely noticed a handful of remarks on social media from family and friends complaining that they owed more this year or they got a smaller refund check and, you know, blaming Trump, saying: "Yeah, so much for that tax reform." Can you explain to me why this might be? Why did people get smaller refunds or did they feel that they got cheated this year for some reason.

MICHEL: So, after the tax cuts and jobs act went into effect, the IRS changed some of the guidelines for how much money your employer sends to the government out of your paycheck each year, each paycheck. Those rules did change and so some people's withholding changed. Many people will see different withholding this year than they did last year, which changes your refund. However, most people have been, bought into this story that refunds are significantly lower because there were some initial media reports based on incomplete data that did show that. What we know now is that refunds are only slightly, like ten or eleven dollars on average lower than they were in previous years. So, just like there's a lot of misinformation from the media about every other topic, there's also a lot of misinformation here as well.

CORDERO: Okay, so first off then, it's not true. People, you know, on average, did not receive less in their refund. And two, some of that has to do with withholding. Can you, you mentioned it a little bit earlier, but, again, at a 101 level, what is withholding?

MICHEL: So, withholding is each paycheck you get, you get it every two weeks, your employer takes some of the money out and sends it to the IRS so that you don't have to send the money in yourself, the government has sort of co-opted your employer to collect taxes for them. And so that's called withholding, how much money your employer withholds from your paycheck to send to the government each pay period.

CORDERO: And so, under the new tax reform, if the government is taking less money out of your paycheck, it would be up to your employer to do that math and figure out how much they should or shouldn't be taking in their withholding. So if they didn't do that properly, you may have gotten a smaller check.

MICHEL: That's correct.

CORDERO: Smaller refund check, that is.

MICHEL: Smaller refund check, yeah. So, because there were so many things that changed in the law, lowering most people's taxes, your employer had to work with the IRS rules and say: "How do I change how much money I send to the government each month?" And so, for some people, maybe your employer got it wrong, which is almost always the case, you can't sort of guess to the exact decimal point each year, which is why we have refund checks. And so some people's refund checks changed, but a lot of people's didn't. Some people's went up, some people's went down, but again, it has nothing to do with how big your actual tax cut was.

CORDERO: So, let's go back to withholding for a second, because you've written about this and I am not a math person. So, wrapping my mind around this isn't easy. But you used an example that really helped me understand it better. Your wrote about how they do it in Switzerland, a system that's helped the Swiss actually conduct one of the most admirable budgeting systems in the world. And this has to do with removing your employer from the equation. That your employer should not be acting as the IRS. Tell me more about this.

MICHEL: When we think about paying taxes, when the government has told your employer: "You have to withhold money, take money out of all of your employees paychecks and send it to us, the government." It removes you as the individual from that relationship of I'm actually paying the government out of every single one of my paychecks for all of the things they spend our money on. Some of them good, some of them are incredibly wasteful or unnecessary. And so what the Swiss do is they have a system where either quarterly or at the end of the year, you have that conversation with the government and say how much money do I owe you and you write them a check.

MICHEL: And it's gonna be a significantly larger check because your employer isn't doing it for you, but you actually get to see how much the government is taking in a cumulative sense from your paycheck. I think most Americans would be very surprised between payroll taxes and income taxes, how much at the end of the year they actually end up having to send to the IRS. Most Americans have no idea, they think that the government's actually paying them money through that refund check, or something else.


MICHEL: I think that's incredibly detrimental to democracy and to the sort of fundamental relationship between me and the government and you and the government.

CORDERO: Yet for some people, their tax refund could be the biggest check all year.

MICHEL: Exactly. The government's relationship with you through withholding and your refund is not I'm paying the government, it's the government paying me. And people are rightfully excited when they get that thousand dollar check, that thousand dollar refund.

CORDERO: It's like a bonus.

MICHEL: Exactly. But what they're missing is you've actually loaned the government that money throughout the year, and they're paying you back. You think about walking in to, if you go to your grocery store and you maybe pay them, overpay them a dollar each time you checkout, and at the end of the year the grocery store says: "Hey, guess what, we overcharged you every time you bought something for us, here's some of your money back." You wouldn't be excited, you would be mad, you'd be why'd you overcharge me every single time I came in here, I'm going somewhere else. And that's really what's going on.

CORDERO: So, for people who might be unsure or for people who are looking to explain to others around them, in the year since these new tax laws took place, what's changed? And I think it might be easiest for me to name the areas you've listed in your most recent op-ed, and have you explain. Let's start with the first one, which is lower tax rates in general.

MICHEL: The tax cuts and jobs act lowered tax rates for every single bracket. The top bracket came down from just below 40% to 37%, but everyone below that, the rates went down or the cut point for where you pay a higher rate, expanded so that almost every American is paying less in taxes, just by that metric.

CORDERO: You talked about a bigger standard deduction. Now, for people like me, my husband does our taxes, what does that mean?

MICHEL: So, the standard deduction is basically just 0% rate. It's how much of your income are you not gonna have to pay any taxes on. So, for an individual, for everyone it almost doubled, for individuals that's 12 000, for a married family, that's 24 000. So for the first 24 000 dollars that your family earned, you don't pay any taxes. You start paying taxes on money above that.

CORDERO: The child tax credit.

MICHEL: The child tax credit doubled as well, it went from 1000 dollars per kid to 2000 per kid, and this makes up for some other changes in the tax cut, but for most Americans, this is increasing the amount of tax benefit you get for each child.

CORDERO: Okay. And then state and local tax deductions.

MICHEL: So this is one of the more controversial pieces of the tax reform. It put a cap on the state and local tax deductions. So, how much money, how much of your state and local taxes are you able to write off on your tax return. This is a good reform because previously, high tax states like your York's and your California's, we were actually subsidizing high tax rates in all of those states. If you were a high income earner in California, forty cents of every dollar you pay to California was subsidized by other federal tax payers. So this reform removes that subsidy for high tax states, and for most payers it's compensated for by lower tax rates and all of the higher standard deduction. So, again, this doesn't mean everyone's paying more taxes, it just means we're paying taxes in a more fair way.

CORDERO: Adam, according to an MBC Wall Street Journal poll, the majority of Americans don't think they got a tax cut this year, and just 17% of people believe their own taxes will go down. Knowing that these tax cuts will expire and conservatives are really facing an uphill battle trying to keep them in place, what can we do to change this narrative?

MICHEL: There's a couple things going on here. The, because of the never-ending cycle of stories about how this was just a tax cut for the rich, or just a tax cut for corporations, or just this or just that, people have been led to believe that they aren't benefiting. But if you read, if you talk to like a tax account, people are coming in and doing their taxes, they'll say, people come in, they'll say: "I don't think this is going to benefit you. How much more do I owe?" And then when they finish doing their taxes, they realize they did get a tax cut. So hopefully some of this will change as people continue to do their taxes and actually see that it's not one in six people that benefit, it's nine out of ten people that are gonna see a benefit.

MICHEL: As you mentioned, most of these tax cuts expire after 2025. As that date gets closer, folks are going to see that the taxes are actually going to go back up, and when you talk to anyone, any American, when you're doing these types of polls, when you ask people "Did you get a tax cut," their answer is very different than "Do you want the tax reform to be allowed to expire." They actually, the way that you conceptualize that, people think about it differently. So I think when we're talking about your taxes are gonna go back up, folks are gonna be much more interested in keeping the tax cut that they got, even if right now they're not telling pollsters that they got one.

CORDERO: So you and I actually, together, worked on a really cool website that I think that some of our listeners might be interested in to help like kind of arm them with this knowledge. Can you tell me a little bit about that website?

MICHEL: Yeah, taxcutsandjobs.com is where we host this map where you can actually go in and click on any one of the 435 congressional districts, you can pick the one you live in by your representative, and see what the average tax cut in each of these districts are across the country. What we found is every single congressional district on average got a tax cut, and I think most interestingly is that the lowest income congressional districts got the largest tax cuts as a percent of the taxes that they otherwise would have had to pay. So, someone that was previously paying a thousand dollars in income tax, could have gotten something like a 20% tax cut. And that's a pretty incredible story that isn't being told almost anywhere.

CORDERO: Thank you so much for your time, Adam.

MICHEL: Thanks for having me on.


Map on how much your district's average tax cut was https://www.taxesandjobs.com/

Adam Michel’s most recent op-ed The Truth About How Much Americans Are Paying in Taxes