A 2017 study shows that nearly 80% of Americans live paycheck to paycheck. Under new tax laws some Americans may have noticed their paycheck stretches a little further. However, for those strapped with debt the difference may seem negligible.
That's why, for many Americans, this year's tax season has come with a degree of sticker shock. In some cases, working families, who are accustomed to getting back modest returns, are feeling saddle bagged by unexpected, enormous tax burdens in the tens of thousands. In this report, we'll look at the math behind these big changes, but first let's talk about a different academic discipline that makes an appearance during tax season:
The Psychology 101 of Tax Returns
Tax returns make people feel good, but according to one CPA, that's all smoke and mirrors. Justin McAuliffe, a prominent CPA in the Bellmore, New York area, wants people to know that when they get a tax refund they are really just getting back money they should have already had access to. "Refunds aren't cool," McAuliffe is quoted saying to Marketplace.org. "That's your money. They're making this seem that a refund is something magical."
The reason McAuliffe has made tax awareness his hill to die on is because he wants the public to know that when they get a tax refund they are just getting paid back on an interest-free loan they've inadvertently issued the government. By changing their withholdings on Form W-4, that can be avoided completely, and they can have more cash relief during the year.
While McAuliffe has a point, many middle class Americans, who are already stretched thin, rely on the annual windfall while planning their year in finances. That's why the unexpected dip in returns or the possibility of having to pay is so surprising.
Last year, tax returns averaged an additional $2,100 in relief to the large majority of working Americans just scraping by on their salaries, alone. This year that number is down 8% to $1,900, on average, and the total number of people eligible to receive any refund is down 16%. Some Americans are shocked to owe money for the first time.
So, why is this happening? Here's the math:
The Math Behind 2019 Tax Season
You may be wondering, if people are getting more in their paychecks, what's the problem? Among the issues not sitting well with American families is their inability to plan for this year's tax burden and the lack of clear guidance from the IRS on how they should have changed their W-4 to prepare for updated tax laws. When it comes down to it, we have little control over the public policy around tax law, and most people thought it would shake out in the end because it always does; instead, they are finding themselves in what feels like a shakedown.
When tax laws changed, the IRS issued a statement that consumers should do a "paycheck checkup" to ensure their employers were withholding the right amount under the new laws. They also issued guidelines for employers to determine how much to withhold, but those are widely regarded as simply estimates. To ensure synergy with these changes, Americans were asked to look to their own paychecks to determine if changes were made accordingly. The government had estimated that 30 million people would increase their take home pay with a greater tax liability, which is 3 million more than previous years.
So, what happens when you increase take home pay for 90% of Americans? If they don't adjust their W-4s to account for it, they may end up underpaying the government, which could result in increased tax burden. Unfortunately, a lack of transparency in government bureaucracy makes it virtually impossible for you to come up with the actual math that allows you to understand how to adjust your paycheck. The best we can suggest is that you grab a few recent pay stubs and sit down with the IRS Withholding Calculator, designed to make this process a little easier. If this is the first time you're hearing about this tool, you aren't alone. Moreover, if you have a complex tax situation, like multiple income streams from various lines of self-employment, this tool may not work for you.
That begs the question, when major legislation takes effect that could impact typical households, how should it be addressed with the public? If the 2019 tax season has taught us anything, it's that we need a better system of preparing constituents for big changes to come. In the meantime, though, if you're struggling with a high tax burden for the first time, the IRS has repayment plans that might decrease the burden imposed by a single lump sum payment. To learn about repayment options, visit the IRS website.