Did You Get a Tax Cut?

There have been many news stories and social media posts about whether people received a tax cut or tax hike this year.  Much of the discussion focused on whether people received a change in their refund or whether they owed tax this year, but refunds and payments relate to tax withholding – how much was taken from a paycheck throughout the year compared to how much tax was actually owed.  While it is painful to have to pay when people are used to getting a refund, this has nothing to do with whether they got a tax cut or tax hike under the new law.  Hopefully that message has broken through, but that still doesn’t answer the question for most people:  Did I get a tax cut?

Estimate Your Tax Cut or Hike

Here is a simple way you can estimate whether you got a tax cut or tax hike and the amount of your tax savings or increase. 

This method is NOT perfect. The best way to figure out whether you got a tax cut or hike would be to run this year’s info through last year’s laws, but if you don’t want to spend hours re-doing your taxes, this calculation will at least get you in the ballpark if your financial situation was pretty similar to the previous year.

  • Calculate your effective tax rate by dividing Total Tax (2018 1040 line 15) by your Total Income (2018 1040 line 6).  This percentage is your effective tax rate.  Do the same for 2017, but the lines are different (line 63 for Total Tax, line 22 for Total Income).  Compare 2018 and 2017 to see if your effective rate went up or down.
  • Multiply 2017’s effective rate by 2018’s Total Income and compare the result to the Total Tax in 2018 (2018 1040 line 15).  This will tell you what you would have paid if last year’s effective rate applied to this year’s income and give you an estimate of your tax savings or increase.

Your tax picture can change in small or large ways due to sources and amount of income and deductions, so this is only an estimate.  If you had significant financial changes this year – bought or sold a house, changed jobs, had a kid, retired, etc. – this method may not work well at all.  Even something routine like paying a mortgage over the course of a year reduces your deductible interest payments.  However, if your financial picture was fairly consistent from 2017 to 2018, this will give you a good idea of what your increase or savings was.

Change Your Tax Withholding

If you haven’t done it already (and most people haven’t), you need to update your tax withholding on form W-4.  If you had a big change in your refund or payment this year, don’t delay.  Next year will be worse because the new withholding tables will apply for 12 months instead of just 9 months in 2018.

Here’s a good primer on how to do that.