Americans expected a lower tax bill in 2018 because of the highly touted Tax Cut and Jobs Act signed into law in December of 2017. Yet as people do their tax returns we hear stories of smaller than usual tax refunds, and accusations the government lied to them. A smaller or larger tax return is not an accurate way to determine if you truly got a tax cut, however. To determine if the amount of taxes you paid increased or decreased you have to dig a little deeper.
Before Starting
Before we get started, a few things to keep in mind.
- The United States tax code is extremely complex. If your financial state in 2018 was largely unchanged from 2017 the calculations outlined here will give you a good idea whether you received a tax cut or not. However any major changes in your financial state during last year may affect your tax rate more than the Tax Cut And Jobs Act, and therefore you can’t make an apples to apples comparison.
- The calculation below determines your federal income tax rate for 2017 and 2018 and then invites you to compare the two. You can’t just look at the raw amount of tax paid unless your income was exactly the same. By calculating the federal income tax rate for both years, you will see at what rate you were taxed.
- In order to participate in this exercise, you will need to have completed tax forms for both 2017 and 2018. Without this information you can’t accurately state whether you enjoyed a tax cut in 2108 or not.
Step 1: Find Gross Income
From your 2017 tax form, find your adjusted gross income. If you used form 1040 take the value from line 22. If you used form 1040EZ use the value from line 4.
We’ll refer to this value as GrossIncome2017.
From your 2018 tax form, find your adjusted gross income on line 7 of form 1040 (1040EZ has been discontinued).
We’ll refer to this value as GrossIncome2018.
Step 2: Find Federal Income Tax Paid
Next, find the amount of federal income tax due on your 2017 tax form. If you used form 1040, use the value on line 63. If you used form 1040EZ use the value on line 12.
We’ll refer to this value as FederalTax2017.
From your 2018 tax form find the amount of federal income tax due on line 15 of form 1040.
We’ll refer to this value as FederalTax2018.
Step 3: Calculate Federal Tax Rate
Calculate your 2017 federal income tax rate:
- FederalTaxRate2017 = (FedralTax2017 / GrossIncome2017) * 100
- FederalTaxRate2018 = (FederalTax2018 / GrossIncome2018) * 100
The two tax rates are represented as a percentage.
Step 4: Compare Tax Rates
If FederalTaxRate2017 is larger, then you received a tax CUT in 2018. If FederalTaxRate2017 is smaller, then your tax rate INCREASED in 2018. If they are the same, your tax rate remained the same.
If your tax rate decreased, but so did your refund, you might be wondering what happened. When the Tax Cut and Jobs Act passed, everyone should have filled out a new W-4 to adjust their paycheck withholdings. However, very few did resulting in less taxes being deducted from their paychecks during the year, and thus a smaller refund or some even owe the federal government.
Many taxpayers assume they missed out on the tax cuts enacted by the Tax Cut and Jobs Act by simply comparing this year’s refund amount with last year’s refund. To really know if you’ve received a tax cut in 2018, you have to dig a little deeper.
EOD Nation, do the calculations and find out for yourself. Did you receive a tax cut last year?
My tax burden was lower than last year. I have read a lot about low returns and people complaining and blaming President Trump. People didn’t pay attention to the monthly reduction. I invested the extra money each month, instead of the government getting that opportunity to invest for their benefit. And yes, I think it is nice to get a nice return windfall, but I am looking at the long picture, not the short one.