Show a young child two glasses, one tall and narrow and one
shorter but bigger around, and ask the child which holds more water. He will pick the taller glass, even though
the dimensions of the glasses make it obvious to an adult that the shorter one
holds more. Not until about age seven
can the child start to reason and differentiate how much each holds in
comparison to the other.
I thought about that when I read this week that people are
complaining that their tax refunds are smaller this year in the aftermath of
the income tax law changes. “Where’s the
tax decrease we were promised?” they ask. (Actually, as of this week, the IRS
reports that the average refund is running about 1% higher than last year, but
that doesn’t seem like a lot to someone who heard that Congress and the
president were giving him a big tax break.)
Instead of looking at how much money you get back in April,
it is much better to determine what you actually paid in taxes. A big refund check looks like the tall glass
does to a child: it’s more. But does a
smaller refund check mean you paid more in taxes? No, it doesn’t. An individual’s income and tax situation can
fluctuate year to year. Moreover, the
IRS changed its withholding tables for 2018 in accordance with the lower tax rates
of the new tax law. Most people were
seeing more money in their paychecks each pay period, meaning they had less
withheld in taxes. The “big refund” came
to taxpayers in small doses throughout the year.
To make an accurate comparison of taxes paid from one year
to the next, divide your “total tax” (it’s line 15 on this year’s form 1040) by
your adjusted gross income (AGI, line 7).
This calculation gives you the percentage of your income that you
actually paid in taxes for the year. Do
the same calculation for the previous year’s taxes and compare the rates. Actual dollar figures will vary because your
income probably was different, year to year.
But comparing percentages gives you a standard by which to judge your
tax burden.
We talk about “tax rates”, but the rates that are quoted can
be deceiving. You might be told that by
virtue of your income level you are in a certain tax bracket and pay a certain
percentage tax rate. But that rate is
not applied to every dollar you make. If
you’ve never done the calculation I described above, I think you will be
surprised at the actual percentage you pay overall. And even if you have done this calculation
before, compare the outcome for the 2018 return against the 2017 and 2016
returns. Did the tax law change in your
favor?
It’s unfortunate that people hope for a big check from the
government this time of year. What they
are saying, essentially, is, “I hope I really overpaid the government a lot in
2018.” After all, a tax refund is
exactly that—a refund of the excess you paid to the government. Why would you want to overpay and then jump
through hoops just to get it back? Would
you do that with any other expense you owe?
Overpay the electric bill every month, with the promise that the utility
will give it back to you next year? I
don’t think so.
Of course, the psychology of the whole thing might be, “If I
spend this much time (or money) preparing my tax return, then I want a big
check back in exchange for my trouble.”
I can understand that thinking.
But I prefer to see it as, “Look how close I was in estimating how much
I would owe in taxes so that I could save that money throughout the year and
make some interest on it.” A different
perspective, perhaps; but with more people eligible now to file without having
to itemize deductions, maybe the actual filing will be easier and will lessen
the demand for a huge refund.
No, actually I don’t see that happening. Human nature doesn’t change that easily.
Until next time,
Roger
“Pay all that you
owe, whether it is taxes and fees or respect and honor.” Romans 13:7 CEV
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