Recent headlines report Tax refunds for 2018 dropped 8.4 percent during the first week of tax filing season, says the Internal Revenue Service.
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Taxpayers may receive smaller tax refunds or even worse, people may have to pay taxes. The IRS reports the average refund this year so far has been $1,865, compared with $2,035 during the same period a year ago.
Because there have been only minor changes to the tax code over the last few years, it’s been relatively easy to prepare a Trial Tax Return and estimate what a tax bill would be, especially if there weren’t many material changes to a taxpayers financial life. 2018 is different because the Tax Cuts and Jobs Act, passed in December 2017, enacted a number of changes: New tax brackets, an expanded child care credit, doubling of the standard deduction and limiting some itemized deductions are all part of the new tax package.
These changes, in place for the 2018 tax year, have created uncertainty. Many Americans don’t understand exactly what changed and almost half have no idea how the changes will impact their tax returns.
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Not only did the Tax Cuts and Jobs Act make changes to the tax code, but the Act also made modifications to the tax withholding tables. Based on estimates of tax owed, many taxpayers saw a reduction in tax withholding from their paychecks. In turn, this reduction in withholding statistically translated to higher paychecks throughout 2018 and thus a smaller refund when taxes are filed.
One tax-related question we regularly hear revolves around who pays what in taxes? Here is an update: The latest tax information available from the IRS is from 2016 returns. Based upon this data, the top 1% of individual filers paid 37.32% of all federal income taxes. This group reported AGIs of at least $480,804 to reach the top 1% category. The highest 5%, reporting an AGI of $197,651 or more, paid 58.23% of total income tax and accounted for 35.20% of all adjusted gross income. The top 10%, those with AGIs of at least $139,713, paid 69.47% of the tax collected and brought in 46.56% of individuals’ total adjusted gross income for the year.
The bottom 50% of filers paid 3.04% of the total federal income tax. Their share is low because the figures don’t include Social Security tax payments and because many of them get material tax relief through refundable tax credits.
Written by Jon McGraw, President of Buttonwood Financial Group, LLC