May 29, 2024
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May 29, 2024
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Tax Refunds Don’t Give the Total Picture

When you think of geniuses, who do you think of? Steve Jobs, inventor of the iPad, iPhone and other amazing products, probably comes to mind. What about Bill Gates, the founder of Microsoft? Maybe your choice would be Kevin Systrom, creator of Instagram, the app that allows millions of women to stalk other people without feeling like creeps. Sure, these guys are solid choices. But I think we can do better.

Those guys invented extremely productive and useful products (well, except for Instagram) and sold them to the public. Sounds like an easy sell to me. See, when I think of geniuses, I think of people that were able to sell complete garbage and dupe us into thinking we needed it. Let’s take the inventor of the fidget spinner as an example. For those who may have been in a coma in 2017 and missed out on this craze, a fidget spinner is a small toy that you hold in the middle and it spins around. Overall, it’s a pretty dumb toy as proven by the fact that no human being has purchased one in over a year.

Unlike for Steve Jobs and Bill Gates, the real brilliance isn’t that this inventor created this incredibly useful product that they sold to the masses. I assume they knew that if kids came to their parents to ask for an object that simply spins around and does nothing else then most parents, including myself, would have said no. So they marketed this not as just some simple toy. No, this was a miracle toy! It was touted as an antidote for attention deficit hyperactivity disorder, anxiety and autism. How could you say no to that?!

Here was an actual conversation I had with my daughter a couple of years ago:

Daughter: I need a fidget spinner so I can concentrate better in class.

Me: Spinning a toy on your finger will help you concentrate better in class? That doesn’t sound right.

Daughter: Yes it will. And it helps relieve stress as well.

Me: You’re 8 years old. Your biggest worry is how long you can spin a toy in class before you get caught. That doesn’t sound stressful.

But if I could help my daughter concentrate better and ease her very stressful life for only $12, how could I say no? Now, of course, most scientific studies have since proven what I already assumed back then—playing with toys while your teacher is speaking doesn’t help you concentrate more on what they’re saying.

But then Manny Stul entered the scene and basically said hold my beer, fidget spinner makers, I’ll show you a true genius. See, he was the creator of Shopkins, quite possibly the most ridiculous toy ever created. And while the fidget spinner was incredibly useless, at least the company was able to convince gullible consumers, such as myself, that it served a useful purpose. For those who are not sure what Shopkins are, they are essentially one-inch-tall pieces of rubber in the shape of various household items such as a roll of paper towels, a chair, a shoe etc. The only difference is that there’s eyes painted on them.

These Shopkins toys can’t cost more than three cents to make, yet they sell for close to $15 for a 12-pack. There is absolutely nothing useful about these whatsoever. I mean I can’t even fathom what a child does to play with them. With a Barbie doll, for example, children can use their imaginations and pretend like they’re hosting a keg party at the dreamhouse. With a Shopkin, does the kid pretend like he’s a vacuum going out for drinks with a couch, a toothbrush and a stiletto? I’m all for diversity, but that’s one motley crew.

The whole concept is extremely odd, but as dumb as I think it is, Manny Stul turned this into a $1.8 billion empire. Apparently if you paint a pair of eyeballs on anything then you can sell it to kids.

In fact, this was another actual conversation with said daughter mentioned above when Shopkins were all the rage:

Daughter: Daddy, can you look on eBay for a certain Shopkin I need? It’s a toilet plunger.

Me: (Looks on eBay…) This tiny toilet plunger with eyes costs $10! Are you insane?

Daughter: Oh, that’s a great deal! This toilet plunger is ultra rare!

But I guess it’s really all about perspective. While Shopkins seem absurd to me, to millions of kids these were the greatest thing ever. Or as the saying goes, “One man’s ultra rare miniature toilet plunger is another man’s treasure.”

Reading the news headlines during this past tax season really solidified how people have very different perspectives on how they view taxes. See, this year was the first tax season with the many tax-law changes that were recently introduced under tax reform. After all of the talk since the Tax Cuts and Jobs Act of 2017 was first announced, this was the first time that taxpayers were finally able to see once and for all how their tax situation has changed under the new laws.

Almost every day I would see another headline about how tax refunds compared to the prior year. At one point, tax refunds were higher than the year before. Then later on they were lower. According to the latest data (keep in mind this is not final data due to the many tax returns on extension) the average refund was $2,725, down 2% from $2,780 in 2017.

This illustrates how many taxpayers view their tax situations. Their focus is solely on the tax refund in April and not on what they are paying during the year.

But should this really be the way we view our taxes? In reality, paying taxes is similar to paying back a lender. You owe the government a certain amount of money. However, we don’t know exactly how much we’ll owe until April of the following year when we perform the full calculation on our tax return. Maybe we overpaid, maybe we underpaid.

If we underpaid, then we just need to make the IRS whole when we file the return and call it even-Steven. If we overpaid, then the IRS is simply paying back our interest-free loan that we gave them during the year. It’s really no different from giving a cashier a $20 bill for something that costs $18 and then getting back $2 change. This is by no means a lottery win. This is your money you’re getting back, not the IRS’s money.

Many taxpayers pointed to these headlines mentioned above about refunds being down as proof that tax reform actually cost taxpayers more in taxes. But whether you received a refund when you filed or owed more taxes when you filed, this is actually not an accurate way to measure the effects of tax reform on you. You can’t just look at what happened in April when you filed your tax return, you need to consider how much you paid all year in taxes.

Because the payroll withholding tables changed early last year, less tax was coming out of your paycheck, which meant more income was going into your bank account. In other words, if you were claiming two allowances on your W-4 before the withholding tables changed, then you were getting to keep more of your paycheck even though you didn’t change those two allowances.

So the only fair way to analyze the affect of tax reform on your tax situation is to compare your total tax liability for 2017 versus your total tax liability for 2018. Just as an FYI, recent data shows that the average U.S. taxpayer paid $1,200 less in taxes in 2018 versus 2017. For New Jersey taxpayers this difference was even more pronounced, with taxpayers paying $1,972 less in 2018.

Now, this doesn’t mean that the average New Jersey taxpayer had a $1,972 greater refund when they filed their tax return. This is because many people saw much of that benefit throughout the year as less tax was withheld from their paychecks.

It also doesn’t mean all New Jersey taxpayers did better under tax reform. Some did much better while some did much worse. There are many factors that resulted in the new tax laws having both positive and negative effects on taxpayers. But the difference in your tax refund alone is not an accurate measure of how you fare under tax reform.

By Daniel Magence, CPA

Daniel Magence, CPA, Esq. is a principal at Pristine CPA Solutions, LLC ( Pristine CPA Solutions offers tax and accounting services to individuals and businesses of all sizes, whether it’s tax returns, bookkeeping, payroll services or personal income budgeting. He can be reached at [email protected] or 201-326-6908 if you have any questions or comments, or are interested in using Pristine CPA’s services. Feel free to contact us for a free consultation.

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