Stop Blaming Trump for a Smaller Tax Refund. Instead, Thank Him.

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Before the montage of hate mail cascades in after reading the headline, rest assured, this isn't a political statement for or against President Trump, or the passage of the Tax Cuts and Jobs Act. Rather, I'll attempt to show why, despite early data from the Internal Revenue Service (IRS), a majority of Americans should be thankful for one particular change in U.S. tax law that should make their lives, at least financially, a lot better.

The Tax Cuts and Jobs Act brings sweeping changes, and not everyone's a happy camper

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As nearly all of you are well aware, in December 2017, President Trump signed into law what's arguably the largest sweeping reform of the U.S. tax code in more than three decades. The Tax Cuts and Jobs Act (TCJA) permanently reduced the peak marginal corporate income tax rate from 35% to 21%, while passing along a mixed bag of changes to individual taxpayers that are due to sunset on Dec. 31, 2025.

Some of these changes involved the reduction of federal income tax rates and/or the expansion of income thresholds tied to these brackets. Couples with young children will also see a substantial increase in the Child Care Tax Credit they're eligible for.

On the other hand, popular deductions and credits were also reduced or removed in order to simplify the tax code under the TCJA. New limits on the mortgage interest deduction and state and local tax deduction, along with the elimination of personal exemptions, have some folks steaming, with the expectation that their tax bills will actually increase.

The big question has been: What effect would the TCJA's passage have on individual taxpayers in 2018? With initial data finally emerging, we're able to make those assessments.

For the week ending Feb. 1, 2019, IRS data shows the agency received 16.04 million individual tax returns, down 12.4% from the previous year, with an average refund being issued of $1,865. That's down 8.4% from the $2,035 average refund issued at the same time last year. On the surface, this data makes it appear that the TCJA has pulled the wool over the eyes of the average American taxpayer, who is now taking home less than he or she was last year. But you have to do some digging to get to the truth of why refunds have declined.

Here's the real reason tax refunds are down in 2019

Last July, the General Accountability Office (GAO) issued a 26-page report regarding individual and employer responsibilities with regard to tax withholding. Employers are required to withhold a certain percentage of your income, but workers also have the ability to modify their federal tax withholding by adjusting their W-4.

The problem, as described by the GAO, is that the TCJA made a number of changes to the tax code that, when combined with data limitations for the U.S. Treasury when crafting tax-withholding guidelines for 2018, led to more under-withholding and less over-withholding. In plain English, this just means that fewer dollars are being taken out of workers' paychecks under the new Treasury model being implemented by employers, leading to smaller end-of-year refunds, and some folks actually owing money who had never owed before. That and workers not fully understanding these changes, meant few knew how to accurately adjust their tax withholding in 2018.

Under the previous tax code, about 75% of taxpayers were receiving a refund, but early data from the IRS shows that while returns received are down 12.4%, total refund issued has fallen by nearly twice as much (24.3%). In the view of the Treasury, the new system in which fewer people receive a refund is more balanced than the previous tax system.

Believe it or not, this is a good thing

While it is true that not all individual or married taxpayers will necessarily see a reduction in their effective tax rate, a majority of taxpayers should be thankful for this change for one very good reason: You'll be getting more of your money upfront, rather than offering the federal government an interest-free loan for possibly more than one year.

There's long been an incorrect belief among taxpayers that receiving a refund is a good thing. Unless you're living without a budget and have absolutely no self-control with discretionary income, a tax refund (i.e., over-withholding) is a bad thing. If you were receiving a larger weekly, biweekly, or monthly paycheck, you could put your money to work now, rather than waiting more than a year to do so.

For example, receiving a higher paycheck now as a result of withholding changes under the TCJA could help consumers tackle a record amount of outstanding credit card debt. Instead of waiting months or longer to collect a large refund to apply to your outstanding debts, you could use the added income in each of your paychecks now to reduce your principal before interest has an opportunity to build on what you already owe.

Getting more of your earned income up front also means the possibility of putting this money to work in the stock market, which has returned 7% historically, inclusive of dividend reinvestment and when adjusted for inflation, or via other investment avenues.

The point being, a smaller refund isn't indicative of Trump's tax law failing America's workers. Rather, it's a sign of more efficient tax withholding, which, for a majority of Americans, is actually a good thing.

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