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Americans Start to Feel the Effects of the Tax Cuts and Jobs Act

PC: https://www.kiplinger.com/article/taxes/T055-C032-S014-5-ways-to-help-control-your-taxes-in-retirement.html

By: Terri Morris

The 2019 tax filing season had a slow start as the IRS and many other federal government agencies were forced to halt operations due to the longest federal government shutdown in U.S. history.[1] The IRS closure left Americans wondering how and when they would be able to file their income tax returns.[2]

The federal government reopened on January 25, 2019, after being closed for 35 days.[3] Initial news reports stated that this reopening was only temporary and that another shutdown would occur on February 15, 2019, if Congress and the President could not reach an agreement about funding for a wall along the United States’ southern border.[4]

While another shutdown did not occur, the President circumvented Congress and declared a state of emergency in order to obtain funding for the wall,[5] many Americans now have to worry about the financial strain  they may feel upon receiving smaller tax refunds due to the changes that the Tax Cuts and Jobs Act (TCJA) made to the Internal Revenue Code.[6]

Taxpayers receive a tax refund when they pay more taxes than they owe during the year.[7] Tax refund amounts can be affected by variations in tax rates, deductions to taxable income, payments, employment withholdings, or the amount of income earned.[8] Taxpayers count on their refunds for various reasons such as growing their savings, paying off debt, or putting it towards larger purchases like buying a car or a home.[9]

The TCJA is the largest overhaul to federal tax system in 30 years and Americans are currently feeling the effects of one change in particular–the employment withholdings adjustment.[10] The TCJA adjusted the way taxable income is calculated and it also lowered the tax rates on the taxable income.[11]

In response, the IRS had to adjust employment withholding amounts.[12] The employment withholding amounts were decreased, resulting in taxpayers receiving more money in their paychecks.[13] However, many taxpayers were under withheld meaning that they did not have enough taxes taken out of their paychecks throughout the year.[14]

Now, as taxpayers are starting to file their returns, some are seeing a decrease in amount of their tax refunds while other taxpayers have ended up owing taxes.[15] Initial IRS reports state that the average tax refund has decreased by 8.4%.[16] Taxpayers are upset because in years past they either did not owe tax, or they had received bigger refunds.[17] In addition, this increase in tax liability does not reflect any increase in their employment income.[18]

The IRS tried to prepare taxpayers for the changes to the employment withholding amounts when it launched its Paycheck Check Up initiative.[19] This program allows taxpayers to enter relevant tax filing information on the IRS’s website so that they can see if they need to adjust their employment withholding amount, or if they need to put aside extra money in case they were to end up owing tax.[20] Criticism of the employment withholding change had also been reported in the news media over the past year.[21] However, with the backlash only now trending in the news and on social media, it is unclear as to how many taxpayers actually took advantage of the Paycheck Check Up initiative, or followed the reports about how the TCJA would affect their finances.[22]

The TCJA has been a major point of contention in the Legislature and amongst the public from the moment of its creation.[23] As the reality of the TCJA changes start to affect taxpayers, it will be interesting to see if the public outcry will lead to another revision of the Internal Revenue Code.

 

[1] See Irina Ivanova, Shutdown Causing Chaos at IRS – and May Delay Tax Refunds, CBS News (Jan. 7, 2019), https://www.cbsnews.com/news/government-shutdown-delay-irs-tax-filing-and-refund-brings-chaos-just-before-tax-filing-season/. See also Bob Bryan, The Government Shutdown Is in Day 35 and has Shattered the Record for the Longest Shutdown in History, Bus. Insider (Jan. 25, 2019), https://www.businessinsider.com/history-of-government-shutdowns-in-congress-2018-1.

[2] Darla Mercado, Refunds from the IRS May Go Out, but Hurdles to Complete Your Return Remain, CNBC (Jan. 9, 2019, updated Jan. 14, 2019), https://www.cnbc.com/2019/01/09/your-refund-from-the-irs-may-arrive-but-these-tax-hurdles-remain.html.

[3] Nicholas Fandos, et al., Trump Signs Bill Reopening Government for 3 Weeks in Surprise Retreat from Wall, N.Y. Times (Jan. 25, 2019), https://www.nytimes.com/2019/01/25/us/politics/trump-shutdown-deal.html.

[4] Nicholas Fandos, et al., Trump Signs Bill Reopening Government for 3 Weeks in Surprise Retreat from Wall, N.Y. Times (Jan. 25, 2019), https://www.nytimes.com/2019/01/25/us/politics/trump-shutdown-deal.html.

[5] Sarah Binder, Three Takeaways from Congress’s Ability to Avoid a Shutdown – This Time Around, at Least, Wash. Post (Feb. 15, 2019), https://www.washingtonpost.com/news/monkey-cage/wp/2019/02/15/three-takeaways-from-congresss-ability-to-avoid-a-shutdown-this-time-around-at-least/?utm_term=.06e1800b57386.

[6] Heather Long, Millions of Americans Could Be Stunned as Their Tax Refunds Shrink, Wash. Post (Feb. 10, 2019), https://www.usatoday.com/story/money/personalfinance/2017/05/02/the-average-americans-2017-tax-refund-and-how-theyll-spend-it/101145386/.

[7] Amanda McMullen, Tax Withholding: What Causes a Tax Refund to Decrease?, The Nest (last visited Feb. 17, 2019), https://budgeting.thenest.com/causes-tax-refund-decrease-22063.html.

[8]Amanda McMullen, Tax Withholding: What Causes a Tax Refund to Decrease?, The Nest (last visited Feb. 17, 2019), https://budgeting.thenest.com/causes-tax-refund-decrease-22063.html.

[9] Matthew Frankel, The Average American’s 2017 Tax Refund—and How They’ll Spend It, USA Today (May 2, 2017), https://www.usatoday.com/story/money/personalfinance/2017/05/02/the-average-americans-2017-tax-refund-and-how-theyll-spend-it/101145386/.

[10] CNBC, U.S. Congress Poised to Approve Biggest Tax Overhaul in 30 Years (Dec. 19, 2017), https://www.cnbc.com/2017/12/19/us-congress-poised-to-approve-biggest-tax-overhaul-in-30-years.html. See U.S. Dep’t of the Treasury, I.R.S. Publ’n 5307, Tax Reform: Basics for Individuals and Families 1 (2018), https://www.irs.gov/pub/irs-pdf/p5307.pdf.

[11] U.S. Dep’t of the Treasury, I.R.S. Publ’n 5307, Tax Reform: Basics for Individuals and Families 1 (2018), https://www.irs.gov/pub/irs-pdf/p5307.pdf.

[12] U.S. Dep’t of the Treasury, I.R.S. Publ’n 5307, Tax Reform: Basics for Individuals and Families 1 (2018), https://www.irs.gov/pub/irs-pdf/p5307.pdf.

[13] U.S. Dep’t of the Treasury, New Withholding Guidelines Under the Tax Cuts and Jobs Act Will Increase Take Home Pay (Jan. 12, 2018), https://home.treasury.gov/news/featured-stories/New%20Withholding%20Guidelines%20Under%20The%20Tax%20Cuts%20and%20Jobs%20Act%20Will%20Increase%20Take%20Home%20Pay.

[14] Scott Neuman, More Taxpayers Will Owe the IRS in April Because of Underwithholding, Report Says, NPR Newscast (Aug. 1, 2018), https://www.npr.org/2018/08/01/634474267/more-taxpayers-will-owe-the-irs-in-april-due-to-under-withholding-report-says.

[15] Heather Long, Millions of Americans Could Be Stunned as Their Tax Refunds Shrink, Wash. Post (Feb. 10, 2019), https://www.usatoday.com/story/money/personalfinance/2017/05/02/the-average-americans-2017-tax-refund-and-how-theyll-spend-it/101145386/.

[16] Naomi Jagoda, IRS Data Shows Initial Drop in Average Tax Refund, The Hill (Feb. 14, 2019), https://thehill.com/policy/finance/430032-irs-data-shows-initial-drop-in-average-tax-refund.

[17] Heather Long, Millions of Americans Could Be Stunned as Their Tax Refunds Shrink, Wash. Post (Feb. 10, 2019), https://www.usatoday.com/story/money/personalfinance/2017/05/02/the-average-americans-2017-tax-refund-and-how-theyll-spend-it/101145386/.

[18]Heather Long, Millions of Americans Could Be Stunned as Their Tax Refunds Shrink, Wash. Post (Feb. 10, 2019), https://www.usatoday.com/story/money/personalfinance/2017/05/02/the-average-americans-2017-tax-refund-and-how-theyll-spend-it/101145386/.

[19] U.S. Dep’t of the Treasury, I.R.S. Publ’n 5307, Tax Reform: Basics for Individuals and Families 2-5 (2018), https://www.irs.gov/pub/irs-pdf/p5307.pdf.

[20] U.S. Dep’t of the Treasury, I.R.S. Publ’n 5307, Tax Reform: Basics for Individuals and Families 2-5 (2018), https://www.irs.gov/pub/irs-pdf/p5307.pdf.

[21] Darla Mercado, 30 Million People Are Not Withholding Enough for Taxes. How to Tell if You’re One of Them, CNBC (Aug. 1, 2018), https://www.cnbc.com/2018/08/01/30-million-americans-are-not-withholding-enough-pay-for-taxes.html.

[22] Stephanie Sigafoos, As Tax Refunds Shrink, #GOPTaxScam Blows Up Twitter, Morning Call (Feb. 11, 2019), https://www.mcall.com/business/mc-biz-tax-refunds-shrink-twitter-hashtag-explodes-20190211-htmlstory.html.

[23] Navigator, Special Report: The Evolution of Public Opinion on Taxes 2 (2018), https://navigatorresearch.org/the-evolution-of-public-opinion-on-taxes/.