With the annual income tax deadline only two months away, you’re probably already making plans for how to spend your annual tax refund. But there’s something you should know before you start pricing vacation packages or new toys…
Your tax refund is probably going to be smaller this year.
In fact, maybe you’ve already seen some people online complaining about their smaller returns. It’s been blowing up on Twitter, and the complaints are only going to get louder as more and more people are disappointed by their returns. It’s not just anecdotal either—the IRS recently published a report that return amounts are 8.4% smaller on average. And while it’s still early in tax season, those numbers are based on over 13 million returns. It’s pretty safe to say there’s enough evidence to spot a trend.
Why Are Returns Smaller?
The Tax Cuts and Jobs Act has been in effect for a full year, and we’re seeing the effects. While many people may worry that a smaller return means they’re paying more in taxes, the bipartisan Tax Policy Center claims that 80 percent of filers should have paid less in taxes in 2018.
The smaller returns are a sign that employers have been more accurately calculating the amounts withheld from each paycheck. So instead of seeing a hefty return, you’ve actually been experiencing the joys of lower taxes by taking home a teensy bit more money in each paycheck. It’s just that, well… apparently not a lot of people noticed that. You know how it goes. Getting a big chunk of money is a lot more exciting than seeing a few extra dollars in each check.
Small Returns Are A Good Thing
While a smaller return might be a disappointment, it’s actually a good thing. It means that your money was in your wallet (or your bank account) where it belongs, instead of being locked away in the IRS’s coffers for the year.
Why does that matter? Well, when your money is with the IRS, it’s not doing you any good. You can’t use it. It’s not gaining you interest. It’s essentially a free loan given to the government, by you. If you like the idea of loaning money to the government for free, then by all means, bank on getting a big return. Also, please write us and let us know why you like doing that. We’re genuinely curious.
A Warning To Residents of High Tax States
Small returns are a good thing, but owing money to the government is not. And if you’re a resident of a state with high taxes, you may find yourself doing just that. Why? Because the Tax Cuts and Jobs Act capped the ability to deduct your state and local taxes from your federal return at $10,000. Previously, these deductions were uncapped.
This could make a big difference in your federal return, so if you’re paying more than $10,000 in state and local taxes be prepared to pay up when it comes time to file with the feds.
What To Do With Your Extra Money
Sooo… you’ve got a few extra dollars in your paychecks, and a little less in your refund. But maybe you miss that feeling of “hey, free money!” If you want to get that back, the best thing you can do is to start putting that extra money to work for you in a savings account or similar.
Maybe that means starting a new savings account where you tuck away a few extra dollars each paycheck, and revisit in a year to spend on something fun—like your tax return, but without loaning it to the IRS first. Maybe you start investing—apps like Acorns make it easy to squirrel away a little at a time. Maybe you just put a little more away in your primary savings account, or your 401k. All of these are good options; saving money is always smart. Sit down with a financial professional to find the best plan for you!
Being more involved with your money will make it easier to feel the effects of the new tax plan. Instead of being one of the millions of people who’s surprised by a smaller return, you’ll be actively invested in the extra money you see with each check. This can help you feel more connected to your finances, and that’s never a bad thing.