We’ve often heard frustrated people exclaim, “I had to pay taxes this year” when faced with writing a check to the IRS in April. The fact is, unless they’re very low income, most people pay taxes every year, mainly through the withholding from their paychecks, pensions or Social Security. With the dramatic change in the tax laws for 2018, many more people may be complaining about writing a check to the government, but they are likely paying less in federal income taxes than in 2017.
The Tax Cuts and Jobs Act that passed a little over a year ago reduced the tax brackets, raised the standard deductions and made many other changes to the federal income tax code. For most filers that itemized their deductions for mortgage interest, property taxes, income taxes, charitable gifts and other deductible items, this year’s changes mean that they will be better off not itemizing and instead can simply take the standard deduction. In addition to reducing the record keeping requirements, most people will also pay less in taxes.
According to a projection by the Tax Policy Center, about two thirds of filers will see a reduction in their federal income taxes in 2018. At Vintage, we analyzed our clients and found the same ratio. The Tax Policy Center found only 6% of filers would see an increase in their taxes, but at Vintage our clients are generally higher income and we expect about 20% to see a tax increase from the new tax law changes. Those affected were likely to be higher income single taxpayers.
The Tax Policy Center projected that the filers getting a tax reduction would see a savings of about $2,180. But that doesn’t mean that you’ll get a larger refund this year. A year ago, the IRS changed the income tax withholding tables and most working Americans got an increase in their take home pay due to the lower withholding figures. Unfortunately, the tax laws are still quite complex and affect taxpayers in different ways. The result is that many people may have seen their withholding reduced by more than the new tax savings and they’ll need to write that dreaded check to the IRS in April.
The IRS was concerned that this could happen and encouraged taxpayers to estimate their taxes for 2018 to ensure that their withholding was enough, but of course few people took the time to try to figure that out. This year will be one of learning and transition for most tax filers as they begin to understand the full impact of the new tax laws. For some, it will mean new tax strategies or a higher tax bill but, for most taxpayers, it will mean less record keeping and lower taxes even if they have to pay the IRS come April.