Sunday, February 17, 2019

Was it a Trump/GOP scheme that'll make you end up writing checks to the IRS this year?

As people start to file their 2018 taxes, a hashtag of #GOPTaxScamStories has become a common fixture on Twitter, filled with stories like this.

The Trump/GOP response to the taxpayers' anger has been a cross between "But didn't you enjoy the extra mone in 2018?" and "You should have known better." These words from Sen. Chuck Grassley (R-Iowa) are typical.
Speaking to reporters on Feb. 13, the Senate Finance Committee chair was frustrated about the messaging around tax season.

"Isn’t it kind of stupid to look at a refund,” Grassley mused. “What your refund is — that doesn’t tell you what taxes you pay."

Though a refund would provide an indication of tax level in instances in which someone does not change their withholding after a change in the tax law, Grassley is right. A refund is not the same thing as a tax bill.

"What taxes you pay is: compare what you’re going to do in 2019 vs what you did in 2018. The bottom line is the answer," he said. "I’m frustrated that people as individual taxpayers may think their refund is the answer to how much taxes they actually paid.”
Except it seems likely that the instructions from Trump's Department of the Treasury are part of the reason too little money was taken out, because GOPs like Grassley wanted to get the tax cuts to show up in people's checks as soon as possible,
Prior to the Tax Cuts and Jobs Act, the portion of any employees’ pay that was excluded from withholding—that is, the employee’s total withholding allowance—was determined by multiplying the number of withholding allowances an employee claimed on Form W-4 by the amount of the personal exemption for that year. The personal exemption amount increased over time because it was statutorily indexed to inflation. The Tax Cuts and Jobs Act set the personal exemption to zero for tax years. beginning after December 31, 2017, and before January 1, 2026. The Tax Cuts and Jobs Act gives Treasury the authority to determine a new withholding allowance structure based on certain statutory factors.
But the problem is that the personal exemption was done away with in the Tax Scam, which typically allowed a two-income couple to claim 2 exemptions. There should have been either a requirement to have people re-file their W-4s, so they'd lower the number of withholding adjustments, or the tables should have been adjusted in 2018 to reflect the fact that more income was being taxed.

Instead, the Trump Administration gave little to no outreach on the subject, and went ahead and adjusted the withholding tables before the changes could be incorporated into the payroll software companies had. They guessed at the amount of new income that would have to be taxed, but left it up to the everyday person to make the changes to their W-4 forms, even though they knew this would result in more people having to write checks to the IRS in early 2019.
Under the Tax Cuts and Jobs Act, Treasury had new discretion for 2018 to adopt rules under which the total withholding allowance is determined based on certain factors, rather than to tie the withholding allowance to the personal exemption. Treasury officials told us that, because of time constraints, they considered the value of the withholding allowance to be the only parameter Treasury could change to affect withholding for 2018. Treasury decided that the withholding tables for 2018 should be compatible with the existing Forms W-4 employees had already filed because there would not have been enough time for employers and payroll providers to accommodate larger changes in 2018 that may have required employees to file new Forms W-4. Representatives of an association representing payroll providers corroborated that payroll providers would need 6 to 8 months to incorporate major structural changes into their software, input new information, and ensure that employees updated their Forms W-4

Treasury recommended the $4,150 value because there was “no higher or lower value that was clearly better” for achieving the goals it outlined. Treasury’s simulation showed that any of the withholding allowance values it analyzed would decrease the proportion of overwithheld taxpayers and increase the proportion of underwithheld taxpayers compared to prior law. As shown in table 1, Treasury’s simulation found that for 2018, using the $4,150 withholding allowance value would result in a slightly lower proportion of overwithheld taxpayers and a slightly higher proportion of underwithheld taxpayers under the Tax Cuts and Jobs Act than would have been the case under prior law.
The estimation was only that 3% of tax filers would see a change from getting a refund to having to pay in, but that's still 4-5 million people. And I wonder if this figure will be badly underestimated when it is said and done. Yes, it's still early in the filing season, but these are not good signs.

Average tax refund, through early Feb
2017 $2,135
2018 $1,949 (-8,7%)

Number of tax refunds processed through early Feb
2017 13.52 million
2018 11.38 million (-15.8%)

Total $ amount of tax refunds, 2018 vs 2017 tax year through early Feb
2017 $28.86 billion
2018 $22.18 (-23.2%)

That's $6.7 billion that is being taken out of the pockets of US consumers, and often unexpectedly. You gotta think that'll hurt the economy in the coming months (and retail sales tanked in December, before the tax issue hit people).

We're a good example of how this is playing out. In 2017, we had deductions totaling more than $34,400, well above the $20,800 writeoff that came from the standard deduction + 2 personal exemptions that were likely assumed in the withholding tables. But when we file for 2018, the $10,000 limitation on the writeoff for State and Local Taxes (SALT) combined with the end of the $8,100 personal exemption means that it's more worthwhile for us to take the $24,000 standard deduction.

That's nice if you want a simpler tax system, but it also means more of our income will be taxed at the federal level. Combine it with the fact that many assumed withholdings and exemptions at the prior level, and that double-whammy explains the surprise checks being written to the IRS, especially in states that rely more on income and property taxes to fund government (like Wisconsin). Note this map for where the SALT limitation will bite the most.

Bottom line - it seems like a lot of the current mess was due to the cynical decision by the Trump/GOP to increase people's take-home pay ASAP so they'd "see" the impact of the tax cut before the 2018 elections, which likely inflated the amount of the actual tax cut that many people actually got. Now we're paying it back in early 2019, and a whole lot of people feel bamboozled, even more than they do with typical GOP trickle-down garbage.

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