The Taxman Cometh

[ Posted Monday, February 11th, 2019 – 17:33 UTC ]

Tax filing season is underway, and the process of millions of Americans understanding the brand-new tax code and tax forms has now begun. So far, it doesn't seem to be going particularly well. Stories are appearing in the media about people being shocked and surprised that things have changed. Some will be pleasantly surprised, but they're not the ones the stories have been written about. Because for many, this year's tax season is going to mean they either get a much smaller refund or that they actually owe additional taxes, when they were used to getting an annual refund. This is bad financial news for any family, but it also points out how skewed most people's general thinking is on income taxes.

By this, I am not referring to the ideological or partisan debates over taxes, but rather the practical nuts-and-bolts way we go about paying our income taxes in this country. In other words, Trump supporters and Bernie supporters alike will probably have the same reaction, because most people focus on the wrong thing when thinking about their own taxes.

This is going to get wonky, but I'll try to keep it as simple as possible. Anyone making an income pays income taxes. Let's take an average citizen or family who makes a decent living and thus pays $10,000 a year in income taxes. That's a lot of money, but this is the number that most people don't focus on or even think about, for the most part. It's a footnote to the real amount they want to hear, which is how big their refund is going to be this year.

Practically speaking, a whole bunch of people see their refund as "getting money back from the government." It's like a free bonus that appears in April each year (or earlier, for those who don't procrastinate). Some years the bonus is slightly bigger, some years it is slightly smaller, but it's a big fat extra paycheck that appears from the U.S. Treasury each year.

Say for our Joe Citizen that his withholding adds up to $12,500 for the year. This means he's getting $2,500 back as a tax refund. Woo hoo! Let's take the kids to Disneyland!

Under the new Donald Trump (or, more accurately, Paul Ryan) tax plan, though, maybe Joe Citizen is going to owe $500. Instead of getting a big bonus check from the government, he'll have to sit down and write a check to the government -- for five hundred bucks that he wasn't planning on spending.

As you can see, this is going to be a shock to many. They're going to assume that somehow the Trump tax cuts raised their taxes. And many of them are going to be angry about that. Even if they're not actually right.

Because Joe Citizen's income taxes could either have gone up, stayed the same, or gone down. The refund has nothing to do with this number, really. That's the part that most people -- including almost everyone in the media outside of business reporters -- just don't fully understand.

Whether or not you get a refund is a product of a formula that includes how much federal income tax is taken out of each paycheck (your "withholding"), how much in total taxes you owe for the whole year, and how close to accurately predicting the total tax are the withholding tables. It's complicated, in other words.

Joe used to have $250 in withholding taken out of each week's pay (for simplicity's sake, we're going to use a 50-week year since it divides so easily). This is where the $12,500 figure comes from, at the end of the year. Picture it as an account at a bank that you pay into all year long.

Joe used to owe $10,000 a year, meaning that at the end of the year, the extra $2,500 came back to him. But what this really means is that the tables which estimate how much to withhold are a bit off. If they were more accurate predictors, Joe would get a much smaller refund. Joe should really be withholding only $200 per week, which would mean zero refund and zero extra taxes owed at the end of the year.

But now the whole pack of cards has been tossed into the air. Joe's tax rates at the end of the year are going to be different (because they were changed by the Ryan tax cut). Joe's withholding is going to be different, because the withholding tables have also been changed. Whether the tables match up at the end of the year is what we'll all be finding out on our tax forms this time around.

The tax people were pressured to give as much money back to people on a weekly basis as possible. This way (Ryan and the Republicans figured) more people would get more money in their paychecks, everyone would agree the tax cut was great, and then they'd all elect more Republicans in the midterm elections. This didn't exactly work out, but that was the plan, at any rate.

But the withholding tables are just estimates, and the Ryan tax code realignment was a radical change to the entire system. Case in point, whereas the main income tax form (1040) had 79 itemized lines on it last year, this year it will only have 23 lines. The 1040A and 1040EZ forms have disappeared. Everyone will be filling out 1040 instead. This has long been a Republican bugaboo -- "make taxes so simple you can fill them out on a postcard." They didn't quite get there this year, but they got a lot closer (23 lines versus 79).

The form is radically different, and how you calculate your taxes is also radically different, in multiple ways. It's too complex to even address here, but the shrinkage in the 1040 form should point out how different things are in the new system.

The people responsible for creating the withholding tables had to figure all of this out, and they had to do it in the dark. The new withholding tables went into effect last February, less than two months after the new tax law passed. There was no redesigned 1040 form at that point, all of those details would be worked out in the future. So they had to make some guesses.

In doing so, they said that one goal was to make the withholding more accurate. Something like three-fourths of American taxpayers get a refund every year, which shows that withholding is overestimated for most people. If the tables were more accurate, people would get much smaller refunds (the average refund has previously been in the thousands of dollars), or would have to pay a small amount at the end of the year.

But what was really driving them was the political imperative to get more money in people's paychecks as fast as possible. So they may now be underestimating what people owe.

Now, this did change most everyone's paycheck. Joe is now only paying $210 a week, but he barely noticed the fact that he's been getting forty more bucks in his paycheck all year long. Forty bucks is a tangible number, but kind of small to be noticed all that much.

So now Joe sits down to do his taxes and finds that he's only paid $10,500 into the system all year long. In other words, he has already gotten back $2,000, but it has been in such small increments ($40 a week) that he didn't really notice it. He certainly isn't thinking about that $40 while filling his yearly forms out.

This is where things get tricky, so we'll split Joe into triplets (who used to pay the same taxes but have slightly different living circumstances). Joe, Jack, and John Citizen have all paid in $10,500 this year and are used to getting back $2,500 each year.

Joe's income taxes actually went down by $1,000. His total tax bill for the year is therefore only $9,000. Trump and Ryan saved him a cool thousand bucks with their tax cut. But chances are he will never think about this or even notice it. Instead, he will get back a refund of only $1,500 and think that his taxes have gone up $1,000. The way he sees it, nothing has changed except that his refund went from $2,500 to $1,500. Ergo, his taxes went up by a grand.

Jack's taxes stayed exactly the same. He's still paying $10,000 a year. The Trump/Ryan tax cut was a wash for him, and didn't change his circumstances at all. But he's only going to get back a refund of $500, so he thinks that his taxes have gone up by a whopping two thousand dollars. Last year, $2,500 refund; this year, $500 refund -- a clear loss of $2,000.

John has the bad luck to live in a blue state with very high-priced real estate. So his taxes actually did go up under the Trump/Ryan system. His total taxes for last year add up to $11,000. But he only paid the same $10,500 as the others during the year, because of the withholding tables. So he now owes $500 in taxes. His actual total tax went up by $1,000, but he may think his situation is far worse than it really is, because the way he sees it, he went from getting a $2,500 refund to having to pay $500, so he thinks his taxes went up by a whopping three thousand dollars, when it was really only by a third of that.

So, to recap: The guy whose taxes went down by $1,000 thinks his taxes went up by $1,000. The guy whose taxes stayed the same thinks his taxes went up by $2,000. And the guy whose taxes actually did go up by $1,000 thinks his taxes went up by $3,000. In other words, none of them is right, because none of them is factoring in that extra $40 a week (which is where the $2,000 discrepancy in each case comes from). And all of them think they're worse off then they actually are. That's bad political news for the Republicans.

How many people will focus on the actual number they should be focusing on -- the total amount of income taxes they pay each year -- and how many will be solely focused on their refund? This flawed way of seeing income taxes is pretty widespread, from what I can tell. It's how most people talk about their taxes, and the lens through which most people see income taxes. The bottom line, for them, is the size of the check they get back each year, and that's all they care about. Everything else is just a flurry of unrelated numbers.

Actually understanding the whole system is complicated. How many people gave up somewhere along the way and aren't even reading this article to the end, for instance? My guess is that the backlash is only going to grow as more and more people do their taxes in the next few weeks. The Trump/Ryan tax cut was already the least popular tax cut in modern history. Already, people saw it as heavily rigged for the wealthy (which is correct, since it was). And now they're going to get a very ugly surprise when they fill their taxes out. Even some people who will actually be paying less income tax will be angry that their refund wasn't as big as usual. And they're going to be in no mood to hear long-winded explanations of how the tax code and withholding tables actually work.

-- Chris Weigant


Follow Chris on Twitter: @ChrisWeigant


28 Comments on “The Taxman Cometh”

  1. [1] 
    C. R. Stucki wrote:

    It's a scary comment on the level of financial and economic (IL)literacy of the average American that he is happy to pay 36% annual interest on his credit card balances, while simultaneously making an interest-free loan to the gov't all year long (in the form of overwithholding) in order to get a big refund when he files his 1040 form in the spring.

    Stupid hardly does it justice!

  2. [2] 
    Paula wrote:

    [1] Stuck: No American is "happy" to pay 36% interest on a credit card.

  3. [3] 
    Paula wrote:

    CW: I think what a lot of people are focused on is how much money they have/need to meet expenses in their lives and a large chunk of America, on a week by week basis, doesn't have enough.

    Most employed (vs. self-employed) people also have zero control over how much $ is being withheld from their paychecks. That's just abstractions versus cash in their pockets they can actually spend or save. So you can't really blame them - especially if withholdings have been too high, thus generating refunds year after year - if they feel upset that rather than getting the refund they've become accustomed to they get less, or none, or even an unexpected bill.

    It doesn't help that Blotus and Repubs were trumpeting how they'd put money in working people's pockets as though it was a tax cut, when much of it was simply a withholding adjustment. That was dishonest.

  4. [4] 
    neilm wrote:

    I'll let CRS's [1] I'm intelligent, everybody else is stupid comment slide - I assume everybody else is as bored with this smugness as I am.

    I have a strange income situation and so have to two estimated payments per year, one in Q2 and one in Q4. I do this for both State and Federal taxes. My goal is to pay about $250 more on each and then have a small refund (otherwise I get dinged on interest charges - it is a thing and it pisses me off).

    So this year, Q2 rolls around and there are no documents ready to help my calculations, so I just use an estimate based on the most similar prior year.

    Come Q4 I find that there is a handy-dandy IRS calculator for people like me, so I plug my best guess on my numbers in and out pops a pleasant surprise. I write the check, take a swing in the dark for my state taxes and tell my wife we can afford to give CW a couple of bucks to keep his column up - happiness abounds.

    Then I finally get my copy of TaxAct! and plug everything in - turns out the IRS calculator was out by $3,000 the wrong way - so I owe taxes and an interest penalty.

    Thus if the IRS couldn't provide a calculator that worked by Q4, what chance did accounting departments have figuring out the withholdings.

  5. [5] 
    Chris Weigant wrote:

    Went back and answered a few Friday comments...

    C. R. Stucki -

    I didn't even go into the whole "you are in charge of your own withholding" thing, or the "interest-free loan to the government all year" thing either. The article is long enough as it is.

    But I did think about it, because you're right about that interest-free loan thing. Some people used to put 99 down on their W-2 (W-4? whichever one you have to fill out when you get hired...), so that they would get every dollar back all year. Then they'd stick it in a savings account and get the interest themselves, and pay their tax bill in full at the end of the year. The IRS put this to an end by saying if you claim more than (9? 19? I forget) at the start, then you'll put yourself under immediate scrutiny...

    Paula -

    Something else I should have added, but didn't have time to look up: I think H.W. Bush got in the same pickle, by telling the IRS to give people more money back to make a tax cut look bigger. At the end of the year, people weren't happy. I don't fully remember the details, but I know this has bitten the GOP on the rear end before...


  6. [6] 
    neilm wrote:

    I think I posted this here a few weeks ago when I first read about the projected decrease in refunds:

    The car industry is said to be concerned about the impact. On the other hand, it looks like there were consumers who felt flush, perhaps because of the increase in take home, who bought more cars in 2018 than expected.

    Sadly for the GOP, most people like to eat their dessert after their broccoli, not before it.

  7. [7] 
    C. R. Stucki wrote:


    OK, how about 'Willing' then, because a helluva lot of people are doing just that.

  8. [8] 
    Balthasar wrote:

    neilm [6]: Sadly for the GOP, most people like to eat their dessert after their broccoli, not before it.

    Or rather, the inverse.

  9. [9] 
    TheStig wrote:

    As of Tues. morning, it appears a gov. shutdown has been averted. There is a degree of compromise on "wall like" funding. Trump can claim he got something, but it's really quite small...1.4 billion $ to expand what we have been doing for years. Stuff that has been pretty successful if you consider illegal crossings are at a 40 year low.

    You could call the compromise a fig leaf, and Trump can try and sell that as a dashing accessory to his base, who have so far been willing to buy pretty much everything he sells.

    If you find the image of Trump clad only in a fig leaf off putting, avert your mental gaze and focus on a scene from the still highly watchable film Spinal Tap. Congress is offering up a 1 foot tall Stonehenge with a bunch of little people dancing around it to look more impressive. If you're high on MAGMA this "forced political perspective" may actually work for you.... and it's G rated.

  10. [10] 
    Paula wrote:

    [7] Stuck: people who get loans at 36% are often desperate.

  11. [11] 
    C. R. Stucki wrote:


    I'm certain that is true, but what does it have to do with having overwithholding in order to get a tax refund, while you still pay high interest on your credit card balances, which is what got this conversation started???

  12. [12] 
    Paula wrote:

    [11] Stuck: I disagree with your entire premise. You're simply making assertions and "connections" out of your own assumptions.

  13. [13] 
    neilm wrote:

    TS [9]: The real question is whether Ann Coulter and Rush Limbaugh will accept it.

    It is obviously a major humiliation, but he MAGA crowd will call that "Fake News" and cheer their amazing win - it is vital that somebody inside the cult doesn't convince them otherwise.

  14. [14] 
    C. R. Stucki wrote:


    If you didn't understand or believe my [1], you shoulda said that in the first place, rather than your "No American is happy . . .etc", coulda saved us a lot of time.

  15. [15] 
    TheStig wrote:


    Trump should have claimed a stunning victory and lied like hell about all the details. His Base would buy that! Instead, Trump said he was diasppointed. He admitted he lost. His game is all about winning, or at least pretending you are winning. The MAGA crowd is not going to be happy with a 75 mile privacy fence not payed for by Mexico. I suppose Trump has time to pivot and pretend he didn't say what he said.

  16. [16] 
    TheStig wrote:

    14-Stuck, even if you are going to be all rhetorical-literal, I don't think anybody is happy to pay 36% interest. I've never seen anybody click their heels and twirl while shouting Yay! I'm paying 36% interest on my credit card debt that
    I have no idea how I'm going to pay back. Whatever emotion is associated with crossing your fingers is, I can't see it as happiness related to interest rates.

    People who lose a limb to flesh esting bacteria don't go beaming about how great their amputation was...they accept it's the better alternative than death. Acceptance of something is not the same as being happy about sometimg. I give the match to Paula on points.

  17. [17] 
    C. R. Stucki wrote:


    I thought I cleared that up when I switched terminology from "happy" to "willing".

    What "match"? It's fairly clear the woman responded to the rhetorical usurious interest rate without ever relating to the point of my post. Sorry it took me so long for that to sink in, coulda just as well skipped the exchange.

    It's getting pretty clear that Chris was the only one around here perceptive enough to get my point.

  18. [18] 
    Paula wrote:

    [16] Thanks TS!

    [17] Stuck: As I read it your "point" is that there are unnamed people out there who have high-interest loans and are, in your construction, simultaneously overwithholding on their taxes in order to get a tax refund and you think they are stupid.

    I reject your formulation on several fronts. You have no idea if high-interest loan ppl knowingly or willingly overwithhold on their taxes. You have no idea why they have the high interest loans. You have no idea what they think about either or both or whether they connect the two.

  19. [19] 
    Chris Weigant wrote:

    TheStig [9] -

    OK, the Spinal Tap reference was funny!

    Just had to say that...

    C. R. Stucki [17] -

    Whoa there... I didn't agree with your whole point, just the sub-point. The smart way to do things for taxpayers as things stand is to reverse-engineer the withholding tables.

    Start with: I'm going to owe X in taxes for the year (pretty much what I paid last year) as long as my circumstances don't change. Then divide X by the number of pay periods per year (monthly, divide by 12; weekly, divide by 52). That's what you should be paying.

    Now go to the tax table, find the chart for your pay period (monthly, weekly, whatever), and match the number you just got to the chart. Err on the upside in the chart, so you'll be a tiny bit over at the end of the year. Then see how many exemptions you should be claiming (or whatever the magic number is called on the W2 or W4 -- I'm doing all this from memory, sorry). Fill out a new W2 or W4 with that number on it.

    At the end of the year, you won't get a big refund, but you won't have to pay much either, no matter which way the fine-tuning details work out.

    I'm amazed at how many people don't do this, personally. It's not all that tough, and the withholding tables are publicly viewable (they're not some secret documents only HR departments get or anything...).


  20. [20] 
    Chris Weigant wrote:

    Oh, I should mention "none of that would have worked this year, because the deck of cards got thrown in the air."

    But AFTER you do your 2018 taxes, you can use this method to fix things for your 2019 withholding. Then you'll be OK next year under the new system.


  21. [21] 
    C. R. Stucki wrote:


    I presume that I'm correct in concluding that what got you going on this was the media buzz recent days to the effect that many people are distraught to discover that they're not going to get a refund of the magnitude comparable to previous yrs.

    In that case, it's counterproductive for you to explain to them how the system works and how rational people should manage it. If the media people are correct, it means people prefer a large refund, and don't WANT to manage it rationally.

    Paula responds that we (I) have no right to presume they're being stupid, and who knows, if the irrational system makes them happy, perhaps best to leave them to their financial ignorance.

  22. [22] 
    Paula wrote:

    In passing:

    Warren received a standing ovation from tribal leaders and other Native attendees as she approached the stage. She called on Congress to take more action on Native issues, including “the alarming number of missing and murdered indigenous women and girls,” suicide rates among Native people, housing, health care and addiction.

  23. [23] 
    Paula wrote:

    This is very good:

    Mark Kelly, Gabby Gifford's astronaut/husband launches his campaign for Senate.

    Dems continuing to have cool candidates around the country. Great little video.

  24. [24] 
    C. R. Stucki wrote:


    I missed Warren's conference address to which you refer. I'm wondering if she made any attempt to lay blame for the "missing and murdered indigenous women"??

    Probably wouldn't have been "indigenous" men, right? Gotta be palefaces!

  25. [25] 
    Chris Weigant wrote:

    C. R. Stucki [21] -

    Actually, I've been warning about this ever since the bill passed, pretty much. I can dig out articles from a year ago, if you'd like. I thought it was sneaky to try to frontload the benefits but then not have the realization come until AFTER the midterms had happened. Pretty crafty of the GOP, gotta admit.

    But as to your other point, you're right but not all of them see it the same way.

    Some people know that they could change things, but voluntarily don't. They see it as the government's "forcing me to save up" program, kind of. The only time each year they get a big chunk of extra money is tax refund time. So some people actually plan for it -- "I'll add $200 extra each month to my withholding, then I'll get back $2,400 at the end of the year!" Some go into it eyes wide open, in other words. Not all, and likely note even some -- but a few of the big-refund people know exactly what's going on.

    Of course, for them, they can use the reverse-engineering advice, and just add whatever they want to what they should be paying. I know several people who do precisely that, in fact.

    "I need $200 a week to cover the taxes, but I'm going to take out $250 a week so I get a big check that maybe I can use as a downpayment on a new car or something else I need."


  26. [26] 
    Kick wrote:


    What "match"? It's fairly clear the woman responded to the rhetorical usurious interest rate without ever relating to the point of my post.

    "Rhetorical usurious interest rate"?! *laughs* Neil is exactly right about your boring "smugness."

    By the content of this latest pathetic smug boredom fest of yours contained above and in comment [1], I can only assume that you believe it's merely a coincidence that the overwhelming majority of major credit card issuers are based in states with NO usury laws and with NO interest rate caps on credit cards, and therefore by legal definition there exists no such thing as a "usurious interest rate" on the majority of credit cards.

    The highest interest rate charged to date by a credit card company is 79.9% on a First Premier Credit Card in 2010... and totally legally. The highest interest rate currently charged happens to be 36%... by the same bank, actually: First Premier Bank. However, the average credit card rate isn't remotely 36%... more like 19%... so the "average American" (your term) isn't "happily" or "willingly" paying anything near a 36% credit card interest rate because that rate is an outlier and not remotely an average.

    It's getting pretty clear that Chris was the only one around here perceptive enough to get my point.

    It's getting pretty clear that you have no idea what you're talking about on a fairly frequent basis. Next. :)

  27. [27] 
    Kick wrote:


    Stuck: I disagree with your entire premise. You're simply making assertions and "connections" out of your own assumptions.

    You're simply making assertions and "connections" out of your own ass.

    Fixed it for you, Paula. *grins* ;)

  28. [28] 
    Kick wrote:



    If you didn't understand or believe my [1], you shoulda said that in the first place, rather than your "No American is happy . . .etc", coulda saved us a lot of time.


    If you're truly interested in "saving us a lot of time," you can:

    (a) stop pulling stuff out of your own ass,
    (b) get your facts straight before you post your smug repetitive boring bullshit,
    (c) just STFU altogether.


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