Tax Refund vs Tax Liability
Are taxes up? Are taxes down? Media says: both.Since the IRS published its first report of the current tax season, I have seen a lot of "talk" about how tax refunds are lower than average. I have also seen multiple posts on how taxes are down. How can these things both be true?
The Washington Post published an article based on the initial IRS report that claims based on the data, that average total refund amounts are down, and that Americans are bound to be upset because of it.
And in the next electronic breath, we have an article from Tax Policy Center claiming that the same initial IRS report data proves that average total tax bills are down.
What is the average individual taxpayer to believe? The truth is slightly more complex: both are correct. The IRS information doesn't lie; data is data. Unsuprisingly given the small amount of data that was available at the time of the report, the average refund was lower than the previous year. Americans who assumed their refunds would be the same as previous years may have been disappointed.
What isn't part of that data, however, is that many of those Americans probably saw a slight increase in their take-home pay during the tax year. So instead of receiving $1000 refund, they received $800. Their "missing" $200 took the form of an extra $17 per month in their paychecks. Since many Americans paid less in taxes through the year, they also received less of it back at the end of the year. This can be confusing. Focus on comparing your total 2018 tax bill to your total 2017 tax bill. What really matters is overall tax liability.
FACT: having too much money withheld from your paycheck results in a refund at tax time. In the event of a refund, your total tax bill was less than the taxes you pre-paid. This means that you gave the government an interest free loan, and they are simply returning your money.
My goal with clients is to develop an overall tax strategy that pre-pays the appropriate amount of tax so that they neither owe the IRS additional money, nor does the IRS owe it to them. It requires some vigilance to accomplish this. One way to do this is to perform an occasional "paycheck checkup" using the IRS withholding calculator. Check it out below!