Ever since the Tax Cuts and Jobs Act (TCJA) went into effect last year, there's been much speculation about how it would change taxpayers' take-home pay and tax refunds. Now that tax season is here, we're beginning to see the effects of tax reform on paychecks, refund checks, and tax liabilities.


Bringing More Money Home Throughout the Year

Under tax reform, the income tax rates have been lowered in five of the seven income tax brackets, which is why an estimated 80 percent of taxpayers have paid less in taxes over the course of 2018 than in 2017. For example, a single individual who made $50,000 in taxable income in 2017 owed $7,399 in federal taxes. In 2018, this same individual making $50,000 owed $6,081. That is an annual savings of $1,318.

With tax reform being new last year, employers used estimated withholding tables from the IRS to adjust their employees' withholdings in their paychecks. In 2018, most taxpayers saw their paychecks increase each pay period due to the estimated tax savings. So considering our example above where the taxpayer saved $1,318 in federal taxes, a portion of that savings likely would have been added to each paycheck in 2018 beginning last February.


Child Tax Credit For Children With ITINs

In the past, children and dependents who were ITIN holders and met certain qualifications were eligible to receive the Child Tax Credit (CTC). This year, the CTC increased from $1,400 to up to $2,000 per qualifying child. However, tax reform has changed the guidelines to qualify for the Child Tax Credit, and from 2019 to 2025, children or qualifying dependents must now have a valid and active Social Security Number.


To help offset the impact of the new guideline on this segment of the population, there is a new “Family Credit” this year. This new credit is available for children who would otherwise qualify for the CTC but lack an SSN. The Family Credit is a non-refundable credit of $500 per qualifying child and/or dependent that will reduce the tax liability of the taxpayer, but it won’t generate a refund. To qualify for this credit, the child or dependent must reside in the United States.


Refund Checks Are Smaller

For the 2018 tax season, the average tax refund from the IRS is $1,865 compared with $2,035 for tax year 2017. That's a decrease of 8.4 percent. Since a tax refund check is one of the largest payments a taxpayer receives annually, this smaller refund payment can be quite a shock. To understand why the typical taxpayer is paying less in taxes this year while also getting a smaller refund on average, let's take a look at the bigger picture of tax reform.


It's All About Withholdings

Just because you're receiving a smaller refund doesn't necessarily mean you paid more in taxes. In fact, the opposite is most likely true. As discussed earlier, the majority (80%) of American taxpayers paid less in taxes in 2018 versus 2017, even if they were getting a smaller refund this year.

Also, employers adjusted how much they withheld from employees' paychecks to reflect the lower tax rates. Early last year, taxpayers were encouraged to double-check the withholdings on their W-4 and make adjustments based on whether they wanted a larger refund or more in their paychecks. The problem is few taxpayers actually adjusted their withholdings. For example, Home Depot reported only about 1 percent of their employees had changed their withholding rate.


Bigger Paycheck or Refund: It's Up to You

Will adjusting your withholdings get you a bigger paycheck, a bigger refund, or a smaller tax bill? With the help of a tax expert, that decision can be made clearer to you. Consult with a tax professional  to determine how the changes to the child tax credit, the addition of the family credit, and the larger standard deduction affect you.


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Disclaimer: SiempreTax+® Blogs is an informational source for industry news and related topics. We take every effort to provide honest and accurate tax information, but this information should not be a substitute for professional tax advice. Use our office locator to find your local tax office.