Many people are seeing a decrease in tax refunds from Uncle Sam this year. Tax planning expert Chris Hennessey discussed this, the impact the Tax Cuts and Jobs Act is having on certain states and the six-year planning window ahead for those looking to pay a lower rate on their investment income.
Why Refunds Came in Lower than Expected
At the start of 2018 when the Tax Cuts and Jobs Act first went into effect, withholding tables were revised so that “everyone’s paychecks went up because their withholdings went down… [meaning] every paycheck was a little bit higher,” Hennessey said.
What most people don't realize is that they already received their tax break throughout the calendar year, which is why refunds are down. Hennessey acknowledged what is more important to consider is if people are going to owe more or less in terms of their overall tax liability for 2018.
Citing data from the Tax Policy Center, Hennessey says 85 percent of all Americans will receive a tax reduction, five percent will see an increase and the rest will stay the same. Most Americans, he said, will pay $1,600-1,700 less in taxes for 2018. “Granted, a reduction of $1,600 or $1,700 is not a tremendous amount of money but, on the other hand, to a family of four making 60 or 70 grand a year, it is a lot of money.”
How This Affects States
For the five percent of taxpayers who will see an increase, a good portion of them live in New Jersey, Maryland, D.C., California, and New York.
“Some people will refer to those as blue states but what’s primarily causing this is the $10,000 SALT limitation.” Hennessey continued, “Governor Cuomo gave a speech in which he said the state was losing people to Florida, and in losing them…there’s going to be a budget deficit of around 2.2 billion.”
Many of the people flocking to Florida are close to or already in retirement, a trend that is likely to continue. The U.S. has an increasingly aging population and many people don’t want to live in high-income tax states, such as New York, when they’re retired.
Planning Window Until 2025
“We’re looking at a planning window between now and calendar year 2025, assuming Republicans stay in control of the Senate and this tax law doesn’t go away,” Hennessey said. “Right now, we have a wonderful opportunity, for at least probably the next six years to pay a lower rate in that investment income.”
The individual tax form, 1040, is a bit simpler than in the past but Hennessey pointed out it’s certainly not a postcard and the idea that it will ever become that condensed is a bit farfetched. Though, with the increased standard deduction, Hennessey does think more people will do their own tax return or use a software program to do so. But the days of filling out a postcard are still a long way out.
While your return might seem lower this year, know that you likely already received it via each of your paychecks in 2018. Those states with already high-income taxes are feeling the bite as more high-net worth individuals and retirees flock to lower tax states, thus leaving massive budget deficits, as in the case of New York.
Tax law remains extremely complex and Hennessey doesn’t see that changing. To hear this full podcast with Chris Hennessey and Financial Sense Newshour's Jim Puplava, see Inside the New Tax Law: Who Benefits, Who Lost and What to Do Now.