With many new tax laws coming into effect for the first time, many people are asking the same question: Will my refund be larger this year? The answer, as you may have already guessed, is: it depends. This leads to the obvious: what exactly does it depend on? Before this can be properly addressed it is necessary to distinguish between your tax refund and your tax liability. Your refund is the amount of money you get back from the government when you file your tax return. Your liability on the other hand, is the total amount of taxes that you had to pay throughout the year. For low income individuals or families, the total liability can be as low as $0, while for higher income taxpayers, the numbers can be painfully large.
Now that this has been clarified, there are generally three factors that determine your refund: 1. Your total tax liability. 2. The total taxes that you paid throughout the year either through payroll withholding or estimated taxes. 3. The amount of refundable tax credits (explained later) available to you. By subtracting factor 1 from factors 2 and 3 you can determine your tax refund. However, having a large refund may not indicate a reduction in tax liability at all. It may simply mean that you paid in too much money throughout the year.
For most families in our community, the total tax liability assessed in 2018 is substantially lower than what was assessed in 2017. For taxpayers with large tax liabilities in 2017, this will result in larger refunds, assuming that the same tax payments were made throughout the year. If your 2017 liability was $0 though, the tax liability factor will not affect you. What will affect everybody are factors 2 and 3. If your withholdings or estimated tax payments were less than in 2017, you may actually see a smaller refund. Your overall tax bill is smaller, but your refund is too. This brings us to factor 3, refundable tax credits. A refundable tax credit allows for a refund even when tax liability has already been reduced to $0. The primary refundable tax credits are the Earned Income Credit (EIC) and the Additional Child Tax Credit (ACTC). While both the EIC and the ACTC have been expanded for 2018, for many lower income taxpayers the changes are modest and will result in a small boost to your refunds. For middle income taxpayers however, the combination of reduced tax liability with expanded refundable credits should result in quite the windfall. Taxpayers with several children age 16 and below, with household incomes between 50,000 and 150,000 should see a substantial benefit from the new tax rules.