Under the 2017 Tax Cuts and Jobs Act, lawmakers promised that Americans would get a tax break. Most of them did, with some big caveats: The benefits of the legislation weren’t conferred equally, and some upper-middle-class filers expecting refunds got a rude awakening instead.
New data from the Internal Revenue Service shows that families earning between $100,000 and $250,000 were less likely to receive a refund this year by five percentage points; those who did get a refund, on average, got smaller refunds than they had the previous year. (Filers in income brackets below $100,000 received refunds at about the same rate.)
For slightly wealthier Americans, it was another story: The number of filers with household income between $250,000 and $500,000 who got refunds rose by five percentage points, and those refunds were bigger, too.
Tax experts say this highlights some of the quirks — and shortcomings — of the new tax code and the manner in which it was rolled out.
“It’s not surprising because you had a tax bill that was passed in haste, signed at the end of December and effective January 1. Most people didn’t know what the heck was going on,” said Mark Mazur, director of the Urban-Brookings Tax Policy Center. “The refund results reflect some of that confusion,” he said.
Changes to the IRS withholding tables that kicked in early in 2018 went largely unnoticed by many taxpayers. Since much of the tax cut was spread out across workers’ paychecks over the course of 2018, many people never noticed it. An NBC News/Wall Street Journal Poll conducted around tax time found that only 17 percent of Americans thought they had gotten a tax break. In reality, it’s closer to 80 percent.
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The standard deduction for married couples filing jointly roughly doubled to $24,000 for 2018, but the TCJA also eliminated personal exemptions and pared back or eliminated many itemized deductions.
“In the past, a lot of those folks were able to benefit by being able to deduct all their state income taxes on top of all their real estate taxes,” said Craig Richards, director of tax services at wealth management firm Fiduciary Trust Company International. “Those are the folks who probably aren’t benefiting any longer.” The IRS data shows that the number of returns with itemized deductions plummeted from nearly 40 million last year to fewer than 14 million this year.
The data could be skewed because some wealthier Americans haven’t filed their taxes yet. “Higher-income people did seem to have greater volatility to their tax burden and their refunds,” said Mark Steber, chief tax officer at Jackson Hewitt Tax Service.
Lawmakers’ push to get the TCJA passed in 2017 meant that the IRS faced tight deadlines for hammering out the details of how the new tax rules would be applied, and some aspects — particularly those relating to partnerships and certain types of business income and expenses — weren’t finalized in time for tax day.
Steber noted that the number of extensions filed this year had risen. “We’ve been trying to figure out why there are so many more extenders,” he said. When those returns trickle in, it could very well change the statistical averages.
One likely factor: Confusion around how the new tax code would be applied. “Quite a few of those people still have some uncertainty in the tax law or are waiting for some of these unknowns to be settled,” he said. “The higher-income taxpayers or the more complex taxpayer may have decided to wait,” rather than file an amended return.
The kind of income earned also makes a difference. Households in the $100,000 to $250,000 income bracket probably earn most, if not all, of their money via wages and salaries, but income streams get more varied as the amount increases, and that changes how it’s viewed by the IRS.
“You go further up the income distribution, people have more and more business income, and they tend to file quarterly tax payments,” Mazur said. “The pass-through deduction benefited people with business income, who were generally higher-income people,” he said.
Regardless of income bracket, tax experts urge Americans not to focus too much on their refund, which isn’t necessarily indicative of their overall tax burden.
“The tax refund is a vastly different element than tax burden — a lot of people mingle the two,” Steber said. “Don’t be fooled by the metric of the tax refund. It provides some indication, but it’s not the underlying data you need to know to manage your taxes.”