Is your refund lower than you like (or do you owe) after the Trump Tax Act? Here’s how to fix it.

On social media I’m hearing people complain about their refunds being lower and blaming Trump’s tax reform. There’s some confusion going on. You actually probably DID get a tax cut. Just in a ham-handed ineffective way.

The issue is that the withholding tables are broken. To be honest, they’ve been broken for a long time, which is why people wait with such bated breath to find out if they’ll owe or get a refund. Withholding tables are based on the concept of “exemptions”, but exemptions were wiped off the books with this tax “simplification”. How much your overall tax liability is depends on a hundred things, like your spouse’s income, your income from other jobs, the cost of daycare or college, the amount you owe on your mortgage… stuff your payroll office just doesn’t know.

The fix is to ask people to use their estimated effective tax rate for withholding, but that’s a paradigm shift that the IRS hasn’t been able to put into place yet, what with the new tax code to implement AND a month’s forced shutdown.

So a bunch of people are finding out that their withholding wasn’t enough, BUT what they’re missing is that in nearly every case they actually have a lower tax liability. They simply paid less in taxes in 2018. Their paychecks were slightly higher because of it. It got lost in the wash with the higher health insurance premiums and other moving parts, and it sucks not to get that lump of cash at the end (or to owe!) but the truth is, their actual TAX LIABILITY for the year is probably lower. It has been for almost everyone I’ve checked so far.

Now, the new “postcard” sized forms are horrible, the give-aways to real estate moguls are crassly brazen, and the punishment of both charities and Blue States is gut-wrenching to watch. This tax “reform” sucks and there’s almost nothing to like about it: it got just ONE thing right: a higher standard deduction. So don’t think I’m apologizing for this. Rather, I’m just trying to deal with the hand I am dealt.

How I’d fix my withholding: I’d look at my “Total Tax Liability”, then I’d look at my “Adjusted Gross Income”. What’s that ratio? That’s your Effective Tax Rate. Then I’d tinker with my W-4 at work until I had about that percentage coming out of my paycheck. If you want MORE taken out, REDUCE  the number of your exemptions or change from “married” to “single”.

Another work-around is to claim “Single” or “Married but withhold at higher Single Rate” and 99 exemptions (basically saying withhold nothing) and then add back the amount you actually DO want withheld on the line that asks if you want to “withhold an additional amount” on the next line. You’ll have to name a specific dollar figure. So if you think your Federal tax liability for 2019 will be around $2,600 and you’re paid every other week, fill in your W-4 saying Single with 99 exemptions and withhold $100/pay period. (Maybe a bit more since we’re already into 2019.)

People on social security get to pick what percentage they’d like withheld on the Form W-4V. It’s a saner method. I hope payroll changes over to that soon.


Edited to add two notes:

State withholding is fine in MA: it’s a flat tax with a very low standard deduction. Fill in your W-4 for the state saying whether you’re married or single and how many kids you claim and it works out fine.)

These tips are designed for wage earners. If you are self-employed or living on investment income then you’re going to have to do Quarterly Estimated Tax Payments. That a subject for another day.