Tax Refund Smaller This Year? Why You Should Rethink That Savings Strategy

Written By Mary Beth Eastman
Last updated November 22, 2019

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Personal Finance
March 19, 2019

Simple. Thrifty. Living.

Every tax season the Internal Revenue Service (IRS) processes millions of tax returns and distributes billions of dollars in tax refunds. But if you’re counting on a large tax refund this year, you may want to rethink that tactic. The Tax Cuts and Jobs Act (TCJA) of 2017 may have affected your take-home pay for 2018. It also may have impacted the size of your refund — if you get any at all. So, it may be time to rethink your savings strategy. Here’s how:

As the first major tax reform since 1986, the TCJA of 2017 may lower or increase your tax refund. That’s because the law removed some key deductions and personal exemptions. For example, you can no longer lower your tax liability with personal exemptions. Neither can you use deductions for tax preparation expenses and unreimbursed business expenses. The law also reduced deductions for state and local taxes and interest on your mortgage.

However, the standard deduction increased for many taxpayers thanks to the TCJA almost doubling this deduction and expanding the tax bracket to receive them. For example, the standard deduction for married couples filing jointly for the 2018 tax year is $24,000. That’s compared to $12,700 in 2017.

But if you’re a married couple filing jointly with dependents, you may notice a reduction in deductions if you were depending on personal exemptions. So, it’s important to understand how changes to the tax laws can impact your tax liability. Assess your specific tax situation. Then consider using your money throughout the year according to the tax deductions that help you lower your tax liability.

It’s sound personal finance strategy to use your money throughout the tax year rather than waiting for a huge tax refund. Waiting to collect a large tax refund is like giving your money to the IRS as an interest-free loan. That’s because a tax refund often means you may have overpaid the IRS throughout the year.

Instead, rethink your savings strategy. For instance, pad your savings account by contributing more money to your tax-deferred retirement plan. Consider also building up your credit by paying down student loans and deducting student loan interest you pay off your taxes. Also, contribute to a flexible spending account and health savings account. These items are tax-deductible whether you itemize your taxes or take the standard deduction and can help you save and reduce your tax liability.

With tax law changes potentially impacting your refund, it’s time to rethink your savings strategy. When you sit down to do your taxes this year, choose the best online tax service to help you make the most of your situation and get your deductions exactly right. You’ll have more money throughout the year and make a bigger dent in your debt.

By focusing on reducing your tax liability throughout the year, you can manage your cash flow more effectively.

About the Author

Mary Beth Eastman

Mary Beth Eastman serves as the content manager for Simple. Thrifty. Living, where she is dedicated to helping readers use money and credit wisely. Mary Beth believes that access to the right financial information paired with a growth mindset are essential tools for getting out of debt and building wealth. Mary Beth has a degree in Journalism from Bowling Green State University and has focused her 20-year journalism career on putting readers front and center, carefully considering their concerns and presenting information that will help them in their everyday lives. She has won numerous statewide journalism awards. Her writing on personal finance as been featured on numerous websites in addition to Simple. Thrifty. Living, including Huffington Post and Lexington Law blog. Mary Beth resides in Pittsburgh, Pa., with her family and two rescue dogs.

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