When a Tax Cut Doesn’t Feel Like a Tax Cut


It’s the end of tax season!! In my house, April 15 is a date circled on the calendar. It’s the date I get my wife back! Those who know me know that my wife is a partner in a CPA firm. That means that during the months leading up to April 15, she is working 70–80 hours per week to process her clients’ returns and to make sure that they are not paying more taxes than they should be.

To most people, most of the time, April 15 passes without a lot of fanfare. If you have a relatively uncomplicated financial situation, you probably file your tax return in February or March. If your financial situation is a bit more complicated, you probably have some interaction with your accountant, and they handle the details for you.

But this year is different. Whether you have a complicated tax return or not, chances are you got an unpleasant surprise when you filed your return this year. For the last month or so, the internet, social media message boards, and news reports have been full of stories about people who filed their tax return and received a smaller refund than normal, or they had to send in a payment.


How can that be? Wasn’t 2018 the first year the new tax laws, passed at the end of 2017, went into effect? The most significant tax overhaul in years meant that most of us would owe less in taxes. So why is everyone so upset? It’s because most people don’t pay attention to the actual amount they pay in taxes. Instead, they are focused on the size of their refund. For many, it’s a sort of forced-savings plan. They have taxes withheld from each paycheck and then plan their vacation or big-ticket purchase around their refund. Many vacations and purchases have been pushed back or canceled this year.

It’s important to note that receiving a big refund when you file your taxes is not a good financial strategy. Effectively, you are giving an interest-free loan to the government, and they are simply giving you your own money back in the form of a “refund.” A better strategy is to plan your withholding so that you either receive a small refund or pay a small amount. And that was the problem for most people this year—they didn’t plan their withholding strategy.

Last year, when the new tax laws went into effect, the Treasury Department lowered the required withholding amounts so that you would realize the tax cuts sooner. Most people saw an increase in their paychecks early last year. But when it came time to file the tax return, most had forgotten about that increase and were shocked when their refund was smaller or they had to pay. For most, their actual tax bill was lower, but the amount withheld was lower because they simply had not adjusted their withholding.

If you weren’t happy this year and you don’t take any action, it will probably be worse for you next year. That’s because the reduced withholding requirements will be in place for the entire year, so you will have less withheld.


There’s an easy fix for this “problem.” Go to the IRS Withholding Calculator website and do a “paycheck checkup.” It will help you make sure that you have the right amount withheld from your paycheck. Then you simply fill out a new W-4 and give it to your employer.

As an indicator of how big this issue has become, both The Wall Street Journal and The New York Times ran featured articles on the subject over the weekend. The Journal ran “Once More With Feeling: Fix Your Withholding!” The Times published “Shocked by Your Tax Refund? Next Year Could Be Worse Unless You Act Now.

I shouldn’t have to point out that paying less in taxes is a good thing. So, instead of being upset that your refund was smaller than normal, celebrate that you are paying less (in most cases), and take the steps now so you’re not shocked again next year.

Schedule a 15-minute discovery call with a fee-only financial advisor to discuss your personal situation.