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The First Filing Season under the TCJA

3 min readBy: Erica York

Today, April 15, brings to a close the first taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. -filing season after the Tax Cuts and Jobs Act’s (TCJA) overhaul of the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. system. Now that most Americans have filed their 2018 tax returns, it’s a good time to review what we know about the TCJA’s impact on individuals: Most Americans received a tax cut in 2018. However, that does not automatically mean those taxpayers received a larger refund when they filed their taxes.

While many headlines have focused on the isolated impact of certain changes made by the new law, the estimated net impact of the TCJA is that 80 percent of filers had a lower tax liability in 2018, with another 15 percent having no material change. Only 5 percent of taxpayers were estimated to have paid more in taxes in 2018 than they did in 2017. We estimate, on average, taxpayers in every income group in every congressional district in America saw a net tax cut.

Individuals who would like to see how the TCJA impacted their situation can use our tax calculator.

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The new tax code lowered tax rates, doubled the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. , doubled the child tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. and expanded eligibility, and limited the alternative minimum tax. It also limited several deductions, such as for state and local taxes paid and mortgage interest. We’ve estimated that the changes to the individual income tax will result in compliance savings ranging from $3.1 billion to $5.4 billion as individuals spent fewer hours complying with the tax code.

As part of the tax overhaul, the Treasury Department changed its withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. tables, which in some cases meant tax cuts came in the form of larger paychecks throughout the year but smaller or no refunds at filing. Withholding tables instruct employers on how much to withhold from an employee’s paycheck. The amount of taxes withheld varies based on the paycheck frequency, the number of exemptions an individual claims on their W-4, and their salary.

The Treasury Department also estimated that the percentage of taxpayers who underwithhold their taxes would increase slightly, from 18 percent to 21 percent, but that most taxpayers, 73 percent, would still overwithhold. Ultimately, the effects of the new withholding tables vary depending on each taxpayer’s unique situation.

As of April 5, the Internal Revenue Service reported it had processed 510,000 fewer tax returns than at the same point in time last year. The average refund size that has been issued so far is nearly the same, at $2,833 compared to last year’s $2,864. Aggregate refunds paid are down by 2.6 percent, or by about $5.8 billion.

But, again, the size of a tax refundA tax refund is a reimbursement to taxpayers who have overpaid their taxes, often due to having employers withhold too much from paychecks. The U.S. Treasury estimates that nearly three-fourths of taxpayers are over-withheld, resulting in a tax refund for millions. Overpaying taxes can be viewed as an interest-free loan to the government. On the other hand, approximately one-fifth of taxpayers underwithhold; this can occur if a person works multiple jobs and does not appropriately adjust their W-4 to account for additional income, or if spousal income is not appropriately accounted for on W-4s. is not the best way to view tax savings under the TCJA. As explained by The Wall Street Journal, “The bottom line: If you’re upset by this year’s refund or tax bill, consider changing your withholding to prevent a rerun next year.” The new law and the new withholding tables impact taxpayers and their refunds differently, but the majority of Americans had a lower tax liability in 2018 than they would have had otherwise.