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There has been a lot of commentary on an IRS report that the average tax refund for 2018 was lower by $170 compared to 2017. Some immediately concluded that this was evidence that the 2017 Tax Act was not really a tax reduction. To be precise, the amount of your refund does not reflect a tax increase or reduction but only the amount by which withholding and estimated taxes exceeds the tax due on the income tax return. Many taxpayers’ withholding was adjusted after the tax change so more income after tax withholding was in each paycheck.

Here is a quick way to determine if your tax was reduced under the new law or increased:

  1. Total Income from line 6 of Form 1040
  2. Tax from line 15 of Form 1040
  3. Divide line 2 by line 1 - net tax as a percentage of income           

Now do the same 2017:

  1. Total Income from line 22 of form 1040                                 
    (or line 4 of Form 1040EZ)

  2. Tax from line 63  of Form 1040
    (or line 10 of Form 1040EZ)

  3. Divide line 2 by line 1 - net tax as a percentage of income

 

If the percentage from line three for 2018 is less than line three for 2017, you benefited from the tax act. If the percentage from line three for 2018 is greater than line three for 2017, you didn’t.

This assumes that state and local taxes are not significantly different from 2017 to 2018, and that you didn’t have a significant change in income for 2018 compared to 2017. If either of these apply, then talk to a tax professional for a more refined comparison. Remember that a big refund actually means that you made an interest-free loan to the government in the form of excess withholding from each paycheck.
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