A Pennington woman had to pay about $1,500 more this year when she filed her federal income taxes, and that included a penalty for not paying enough during 2018. Another New Jerseyan estimated he paid Uncle Sam about $1,000 less.
With April 15 now passed and all but the true procrastinators having filed their first returns since Congress overhauled the federal tax law in 2017, the only thing certain is that whether an individual benefited or got slammed by the revisions very much depended on individual circumstances.
“It helped people with families and small businesses,” said Andrea Diaz, a certified public accountant with SKC & Co. in Boonton Township. “Single heads of household did poorly, so did single individuals without children.”
New Jersey, with its high property taxes, was regarded by many as one of the states where the most taxpayers would have to pay more due to the loss of the ability to deduct all state and local taxes. Others had said the higher standard deduction — $12,000 for a single filer and $24,000 for a couple filing a joint return — and lower rate paid would more than make up for the lost SALT deduction.
It is still too soon to tell.
“Unfortunately, broader IRS data — including the net impact of lost deductions due to the SALT cap — lags a couple years behind the filing year, so we won’t have a more accurate picture of 2018 for some time,” said Steve Sandberg, a spokesman for U.S. Sen. Bob Menendez (D-NJ), a vocal opponent of the 2017 tax changes.
From one source, an unexpected result
A report by the tax preparation firm H&R Block on returns prepared through March 30 showed an unexpected result.
“When looking at average tax liability, New Jersey had the largest drop of 29.1 percent on average,” the report stated. “All 50 states and D.C. saw their average tax liability decrease anywhere from 18.0 percent to 29.1 percent.”
“New Jersey fared better than people anticipated,” Diaz said.
Still, a graphic prepared by Block also showed that, when looking only at refunds, filers in New Jersey, Maryland and Washington, DC saw those checks reduced by the largest rate — more than 5 percent — in the nation.
Sandberg noted that Block’s figures are based only on its customers and are not a scientific sample.
A March 2018 report by the Tax Policy Center projected New Jerseyans on average would pay $1,490, or about 6 percent, less as a result of the federal tax revisions. The average tax rate would drop by 1.3 percent to 20.3 percent. But it also found New Jersey would have the largest proportion of filers who would be hurt by the changes, with 10.2 percent of all taxpayers having to dig deeper — $2,120 more on average.
IRS data paints mixed picture
Nationally, the IRS’s latest estimates on 2018 taxes, which take into account all those filed through April 19, found almost the same number of people getting a refund as last year (a small 0.3 percent increase). However, the size of the average refund was about 2 percent less than last year, and the federal government was giving taxpayers a total of $4.4 billion less in refunds.
Still, there are no wide-scale estimates from the government to show the impact of the tax changes.
“We don’t have those numbers yet, other than estimates from the Joint Committee on Taxation that are confidential,” said Mark Greenbaum, a spokesman for Rep. Bill Pascrell (D-9th), a member of the House Ways and Means Committee that oversees taxes.
According to a survey of members by the New Jersey Society of Certified Public Accountants, filers with incomes under $150,000 generally fared better this year than last, while for those with higher incomes, there was little difference in the breakdown of filers who did better and those who did worse.
Diaz said most “pass-through” business owners whose companies don’t pay corporate tax benefited from a change that gave them a new deduction for income from their businesses. Families with incomes of under $400,000 and two or more children also fared well because they got valuable child-tax credits, paid a lower tax rate and did not have to pay the Alternative Minimum Tax. On the other hand, single people, married people without children and heads of households tended to fare worse, particularly if they had high property-tax bills.
But because a decrease in the amount withheld by employers was part of the federal tax changes, even some people who were net winners may not have felt like winners when they filed their returns and either got a smaller refund than in the past or had to pay more.
“It’s reasonable to assume that a tax cut would mean your refund will increase, but that’s not necessarily the case,” said Kathy Pickering, executive director of The Tax Institute at H&R Block and the company’s vice president of regulatory affairs. “The IRS updated how employers calculate how much tax to withhold from paychecks, which means you could have been getting all your tax cut — and then some — in your paychecks.”
Hearing from taxpayers themselves
A Gallup poll last month found that nearly half of all Americans disapproved of the 2017 tax bill, which was championed by President Donald Trump. It also found 43 percent did not know how the new law had affected them, while 21 percent said it had increased their taxes and 14 percent said it had reduced them.
NJ Spotlight asked readers to weigh in on how they fared on their taxes this year. About two-thirds of those who responded said either they had to pay more or got a smaller refund. It’s unclear whether all were talking about the net change in total taxes paid. Those who had done the math and found their total liability had risen, or those who had not and had to write a bigger check to Uncle Sam when they filed their returns, were not happy.
“It looks like I lost a whole lot of deductions,” said Melinda Dower of Pennington, who blamed her $1,500 higher federal income tax bill largely on the loss of the SALT and charitable deductions. “For those of us in the middle class, those deductions were worth a lot to us. They’re what allow us to stay in New Jersey and pay the taxes we do.”
Because she owed so much, Dower said, the IRS charged her a $50 penalty, as well.
“They sent me a note saying they reduced that amount or the penalty would have been even more,” she added.
Changes to the threshold for underpayment penalties
Typically, the IRS assesses a penalty when a taxpayer has not paid at least 90 percent of what is ultimately due, either through withholding or in estimated payments. The agency reduced that threshold to 85 percent, and later, to 80 percent for the 2018 year only because of the changes in the law and withholding.
“It is absolutely unfair to penalize taxfilers for underpayment,” Sandberg said. He said the IRS decided to waive penalties for those who had paid at least 80 percent of their tax liability in advance, after Menendez and other Democrats sent the agency a letter urging officials to do so.
“That certainly helped blunt the impact, but had Treasury not adjusted the withholding tables to create the illusion that people were getting more money in their paychecks, tax bills would have been lower and refunds higher,” he added. “Many of those who saw a drop in their weekly withholdings actually ended up with a big tax on April 15 because not enough was withheld from their paychecks over the course of the year, causing a lot of pain and confusion for folks this tax season.”
Dawn Thompson of Wall said she had anticipated trouble and had more taxes taken out of her paychecks but she still owed an additional $8,000 and also had to pay a penalty. She, too, blamed the capped SALT deduction and an inability to fully deduct all her charitable contributions.
“You feel like you work so hard and you do things right and then you get hit,” she said. “The only thing I could say caused it was the new tax law.”
Beth, who asked to be identified only by first name, did calculate her household’s total net tax liability, including amounts deducted throughout the year, and wound up having to pay $4,107 more in 2018.
“Quite a surprise,” she said. “We thought we’d come out about even with the lower tax rate and the effective elimination of the marriage penalty … It was clear to us that the major cause was the SALT limitation and the loss of other deductions, as well as the loss of personal exemptions.”
Some report paying less to Uncle Sam
But a few people shared stories of lower taxes.
Craig, who asked to be identified only by first name, said his federal taxes dropped between 15 percent and 20 percent.
“I was active early and adjusted withholding to lower my refund,” he said. “It is hard to believe how many people do not understand their taxes.”
That was a problem for a lot of people. While tax professionals were recommending their clients adjust their withholding to make up for the changes in the law and the Internal Revenue Service offered an online calculator showing taxpayers how much they should have withheld, many people assumed the new withholding would be appropriate given the changes in the law.
They can’t be blamed for that, said Diaz, the CPA from Boontown Township.
“Everyone was on autopilot,” she said. “Nobody has really dealt with changes in the tax law for the last 30 years … You can’t just automatically assume people have the capability to understand the changes without guidance.”
And the changes were sold as a simplification of the tax code, making it so easy that one could use a postcard to file one’s federal taxes.
“None of it was more simple,” said Diaz. “The forms were not more simple, the planning was not more simple.”
From Democrats, worries about the deficit
Regardless of how well individuals fared, several of New Jersey’s Democratic representatives said the tax changes remain problematic because the federal government is taking in significantly less money.
Pascrell said the total impact of the changes will add $2 trillion in debt and said the Republicans who passed the bill are being hypocritical — criticizing deficits while President Obama was in office but countenancing them with a Republican in the White House.
Last year, the deficit rose by 17 percent, although Trump administration officials attributed that to increased federal spending, rather than the $1.5 trillion tax cut.
“The Trump Tax Law amounted to a huge windfall for huge corporations and the super-rich at the expense of the middle class and much-needed investments in our nation’s crumbling infrastructure, while driving up our national deficit,” which future generations will be forced to pay, Menendez said. “Thousands of hardworking New Jerseyans were targeted by the SALT cap and, as a result, saw their tax burdens rise, refunds fall and penalties mount due to the Trump Administration’s haphazard tax policy.”