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Given that the Tax Cuts and Jobs Act was all about tax cuts, how can this be? Two reasons.
First, although the TCJA cut individual income taxes for a large majority of income-tax filers, it will increase them for about 6 percent of households (according to Tax Policy Center projections). Candidates for tax increases include those with dependent children age 17 or older (because the personal exemption for these dependents was changed to a potentially less valuable tax credit), employees with significant business expenses (because these are no longer deductible), and taxpayers with large state and local tax bills (because the deduction for these is now limited to $10,000 a year). The 6 percent of households confronting a tax increase translates into 10 million tax filers who may be surprised, unhappy, or both.
Second, some people seem to think that because their refund is smaller than expected, their total liability is higher—even though it isn’t. When the IRS released new withholding tables only a few weeks after passage of the TCJA, it urged taxpayers to check their withholding with a new calculator—available online—and, if warranted, contact their employers to increase or decrease the amount of tax withheld from their paychecks. Of course, most Americans did no such thing. As a result, certain groups of taxpayers, including two-earner couples, those who had adjusted withholding allowances in the past to reflect their specific tax situation, and taxpayers who had large state and local income-tax liabilities, might find that their withholding was way off. The Government Accountability Office, Congress’s watchdog, recently estimated that about 3 percent of households will wind up owing tax, rather than receiving a refund, because of the new withholding tables. That’s another nearly 5 million tax filers who might be surprised, unhappy, or both.
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Taxpayer surprises are likely to keep cropping up throughout the filing season and probably beyond. Some taxpayers will discover that they unnecessarily kept receipts for charitable contributions because the TCJA’s larger standard deduction eliminates the need to itemize deductions. (The Tax Policy Center estimates that the fraction of taxpayers claiming itemized deductions will drop by more than half this year.) More happily, some self-employed people will find that they are eligible for a new deduction that lowers their tax rate. They might wonder whether they can or should shift more income into the self-employed bucket.
When Republicans in Congress began drafting the TCJA, they promised tax cuts, and they promised a simpler process—some even suggested Americans would be able to file their returns on a postcard. One out of two ain’t bad.