April 22, 2019
When the Tax Cuts and Jobs Act (TCJA) was passed in December 2017, the bill brought sweeping changes to the tax code.
The most notable changes include eliminating personal exemptions, nearly doubling standard deductions and lowering tax rates for both individuals and corporations.
It’s all about psychology.
The Internal Revenue Service warned that more people may owe money this tax season, but early returns show taxpayers may not be fully prepared for the change.
By passing the TCJA, the government adjusted the IRS withholding tables, aiming for a better balance — no refund and no money owed. Because of this, most employees saw higher paychecks throughout calendar year 2018, with less federal withholding.
But many Americans utilize a large tax return check in the spring to pay off credit cards or debt, or put the money toward a remodeling project, vacation or other large purchase.
Psychologically, if you’ve trained your mind to expect that fat check every spring, it’s the perfect storm of disappointment when you’re actually told you owe money or will receive a much smaller return.
Essentially, if you receive a huge refund check each year, then you’ve given the government an interest-free loan to use your money all year long, then return it back to you in the spring.
From a tax perspective, that strategy doesn’t make sense. You get less money in your take-home pay all year. The government gets a loan, interest-free. You’re much better off to have decreased federal withholding during the year and a smaller income tax refund.
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