Does Saving with Trump's Tax Plan Mean a Bigger Refund?

Last week I met with a tax client to begin our planning for the second half of the 2018 year. We had previously discussed how he was going to be saving with the new tax laws, which in his mind meant a bigger refund when tax season rolls around. After he began to discuss the vacation he was planning with his tax refund, I had to stop him in his tracks and explain that although he is saving money with the new tax plan, he is not necessarily getting a bigger refund. While he was disappointed, he was glad he had not placed any non-refundable deposits yet.

Unfortunately, I believe conversations like this will be common during the next tax season. All everyone has heard about is how they are going to be saving money with their taxes, so it is natural that most would interpret that as a larger refund. However, what most people did not realize is that they are receiving that savings as part of each paycheck in small increments, and that the larger refund they are hoping for will not be there when April 2019 comes around.

Let’s use Bob as an example. Bob is a single taxpayer, with no dependents, who had W2 wages of $50,000 in 2017 and claimed single and 1 allowance on his W4. In 2017, Bob’s tax liability was $5,645, and he received a refund of $1,006 after having $6,651 withheld from his paychecks during the year. In 2018, Bob will make another $50,000 of W2 wages. However, due to the changes in the withholding tables, Bob will only have $5,208 in federal taxes withheld throughout his paychecks, and he will receive an estimated refund of $938 due to his liability decreasing from $5,645 to $4,370.

As you can see from the example above, Bob is saving $1,275 in tax liability ($5,645-$4,370), however, his refund went down by $68 due to the decrease in his withholding. This is not an issue as long as taxpayers are not expecting a much larger refund. When I meet with my clients, I often preach that it is better for them to get the money throughout the year, and get a smaller refund in April. The government is not a savings account and is not going to pay interest for money loaned all year long.

Curious how your situation is going to turn out? Leave a comment below or reach out and we can start the tax planning process sooner rather than later.