Its not the SIZE that MATTERS!! Why Americans should be happy even though statistics show that the average tax refunds are lower in 2018 than 2017!

I have noticed that the media is reporting that on average Americans are receiving lower tax refunds than in prior years under the new tax laws enacted. Many people are upset about their average refund decreasing this year but is this outrage warranted?

Answer: NO!

Many people consider a tax refund "Extra Income" for the year which is completely FALSE. If you receive a tax refund it means that you paid the government to much money through out the year to cover your taxes due! Basically you are giving the government a free loan for an entire year until they return the money that you already EARNED because you overpaid!

The money was yours all along and they were just holding onto it for you until you file your tax return to claim the refund.

So now you may be asking how do I determine if I am better off under the new tax law?

In order to determine if you are better off under the new tax law you would need to compare the actual amount of taxes due on your tax return year over year taking into account any increase or decrease in income.

For example: (Tax rates and taxes due used in the examples below are not actual tax rates and are for illustrative purposes only)

Your income for 2017 was $70,000, you owed $10,000 in Federal taxes and had income taxes withheld from your wages of $15,000. In this case you would receive a tax refund of $5,000 when you file your tax return. Your effective tax rate in the example above would be approximately 14.28%.

Now lets move on to 2018:

Assume your income for 2018 was still $70,000, you owed $8,000 in Federal taxes and had income taxes withheld from your wages of $10,000. In this case you would receive a tax refund of $2,000 when you file your tax return. Your effective tax rate in the example above would be approximately 11.42%.

As you can see your refund in the example above decreased by $3,000 from 2017 to 2018. Now at first glance many people think that this sucks and the new tax laws are costing them money but that is not true in many cases!

In the example above what you should be focusing on the fact that your effective tax rate decreased from 14.28% in 2017 to 11.42% in 2018! Using the example above this means that your taxes owed actually decreased from $10,000 in 2017 to $8,000 in 2018. Even though your refund decreased you are actually better off because you owed the government $2,000 less in taxes on the same $70,000 of income!

Now I am not saying that everyone is better off, there are some situations where people are worse off under the new tax laws but the way you measure this is by looking at that taxes you actually owed not the refund that you received!

It is VERY important to remember the number that matters is the taxes that are OWED because a refund is just the government returning money you ALREADY EARNED and it is NOT EXTRA INCOME!

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Disclaimer:

This article is for informational purposes only and is not intended to be tax, legal, financial or investment advice. Please consult your own adviser as the tax laws are very complex.