How that new tax law is working out for you

Last year, I talked about the new tax bill, albeit reluctantly. I don’t like to wade too much into political realities, especially now. I think that what we all need more than anything right now is empathy, which includes a desire to understand others and to see them as good and flawed just like ourselves. Furthermore, to realize that there exist solutions that can be a win for everyone.

Unfortunately, that’s political now. Who knew?

Anyway, I made a few predictions last year, and even prescribed a suggestion on how you prepare for this year’s tax season. Let’s see how this holds up.

What changed?

At a glance the Tax Cuts and Jobs Act of 2017 changed a few things in the tax code for you and I:

  • New, lower tax brackets, which meant that the raw amount of tax as a proportion to your income would be lower.
  • An almost doubling of the standard deduction ($12,000 for single people, $24,000 for couples), making it less worthwhile to itemize deductions.
  • A cap on the deduction for state and local income tax (including sales tax and property taxes), otherwise known as SALT, to $10,000, which could make your deductions go down by a large amount, depending on your state and how expensive your mortgage is.
  • An elimination of the personal exemption, which is offset by the increase in standard deduction, but not for those with many dependents.

There are of course other changes in the 400 page bill, but these seems to me to be the most salient ones.

The IRS changed withholding tables in February of last year, which meant that many people received more money in their paychecks.

So that’s where we are.

Winners and losers

Looking at the above list, some losers are pretty obvious:

  • Those with expensive homes. With the SALT cap of $10,000, anyone who pays property taxes on an expensive home is likely to hit the cap. All that extra money that can’t be deducted goes directly against any amount of tax break you may have.
  • Almost everyone who lives in a state with high taxes. You used to be able to deduct your state and local taxes on your federal return, so you weren’t in effect paying taxes twice. But now, there’s that cap, which means smaller deductions. But this only affects certain states, which makes this in effect a transfer of wealth away from those in higher-tax states. Political connection? Of course not.

Who are the winners:

  • Those whose specific situation allows them to take more deductions than deductions eliminated. I recognize that this totally tautological (“the winners are those who win”) but the truth is that no one really knows who is going to make out ahead in this. Too many factors interplay with each other, so one can’t say for sure, with the exception of:
  • People with extremely high incomes. This should be obvious, since it was, in many ways, the whole point of of the tax law change. But even this isn’t necessarily true. Someone with $100,000 in state taxes is on the hook for up to $90,000 in extra taxable income. Will the tax reductions offset this? Not for everyone.

In practice, what appeared to happen was that many people got some extra money added to their paychecks from February on (because of less taxes taken out). As for whether that would lead to an overall increase in take home pay was always a question.

The big reveal

Well, as of now, people are starting to get their refunds back. And according to the IRS, the average refund is down 8.4 percent, from $2,035 to $1,865.

That is, it must be said, a relatively meaningless number, for a number of reasons:

  • It lacks context (did people just have less money taken out of their paychecks?) so it’s unclear if it’s a net positive or not
  • Averages don’t show range. You could be making thousands of dollars less in refunds this year, but if someone is making thousands of dollars more, the average could still come out to 8.4 percent, but it’s a very different outcome.

(And since it always comes up, I’ll remind you that there is absolutely nothing wrong with an interest-free loan to the government. These are behavioral tricks that people use, and who cares if they lost out on the 2% of interest? People aren’t spreadsheets.)

And it’s no good using my own self as an example, because my income situation changed fairly drastically between the previous tax year and this one. I did receive a solid extra amount in my paycheck each month due to changes in withholding. Also, I have a mortgage and live in a high-tax state, but I didn’t hit the SALT cap, and itemizing still made sense for me.

My refund was indeed smaller this year by about $2,000. What does that tell me? Absolutely nothing!

That’s what’s most annoying about these tax changes: they affect pretty much everyone in slightly different ways, depending on where they live, how much money they make, whether they have kids or a mortgage, etc.

(It will be interesting to hear more about statistics once the whole tax seasons is done. We might learn more about who won and who lost.)

Final thoughts

I’ll end by saying that I left out one group of losers in the above analysis of who benefits from the tax law changes, and that is: all of us.

With our government bringing in less revenue, it means that it has less ability to provide more sufficient services to those of us who are going to need them. And that’s before we mention rising income inequality that the redistribution is likely to create and certainly not curtail.

The new tax law is expected to add $1 trillion to our existing debt. And while I don’t think the federal deficit is as big a problem as others do (a government is not a household, and doesn’t have to balance its budget to be solvent), I guess I’m just a little disappointed with what we got for it.

And what did we get? For some people, a few hundred or a few thousand extra dollars. For others, a few hundred or a few thousand less. If you’re wealthy, you likely got a much larger benefit.

But is that really the best we could be doing with that money?

Because I’m thinking that as long as we have a safety net that people can fall through, as long as we have a system that enshrines wages low enough that people can work full time but still live in poverty, and as long as we assume that giving wealthy people more money will somehow magically make our world a better place, we are building a weaker, less resilient society.

Which brings me back to my initial point: what we all need more than anything right now is empathy, which includes a desire to understand others and to see them as good and flawed just like ourselves. Furthermore, to realize that there exist solutions that can be a win for everyone.

This wasn’t that. At all.

How has the new tax law affected you?

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