Buzz
Last year marked the first time we applied the Tax Cuts and Jobs Act to our tax preparation, and many were caught off guard to find their tax refund smaller than usual. However, this doesn’t necessarily mean the new tax law is detrimental to your finances.
Keep in mind: a hefty tax refund isn't always a positive sign. Often, it indicates that you’ve overpaid the government in advance, only to receive a refund check with no interest earned.
In simple terms, when you receive a refund, the government is returning money you didn’t owe, but paid through withholdings or estimated taxes. Unfortunately, they don’t reimburse you with interest, meaning you could have earned more by saving, investing, or paying down debt that would have accumulated interest.
Here’s a video from Washington Post from 2014 that uses Peeps to explain the concept:
And yes, one reason people appreciate large tax refunds is because receiving a big lump sum of 'extra money' all at once feels more impactful than seeing a slightly larger paycheck every two weeks. It’s much easier to think 'I’m going to use my big refund check to pay off debt' than 'I’ll use the extra dollars in my paycheck to pay off debt.'
However, the new tax law was designed to provide us with larger paychecks and smaller refunds. Here’s a summary from MarketWatch on how the Tax Cuts and Jobs Act impacted taxpayers:
Due to the new withholding levels, many people received smaller refunds in 2018. Although these individuals actually paid less in taxes over the year, they were surprised by their smaller-than-expected refunds when filing their 2018 returns. For those who rely on tax refunds as a kind of annual 'Spring Bonus,' these lower-than-anticipated refunds felt like tax hikes.
You should also know that the IRS recently updated the W-4 (the form where employees indicate how much tax they want withheld from each paycheck) to make it clearer how much money you're pre-paying to the government. However, this updated form is also designed to minimize overpayment of taxes—meaning you might see even smaller refunds in the future.
On the bright side, these tax adjustments could result in more money in your paycheck. It’s up to you to make sure you use that extra cash wisely.
