The First Filing Season under the TCJA

Today, April 15, brings to a close the first tax-filing season after the Tax Cuts and Jobs Act’s (TCJA) overhaul of the individual income tax 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. 

The new tax code lowered tax rates, doubled the standard deduction, doubled the child tax credit 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 withholding 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 refund 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.