When Taxes are Lower – Refunds are Lower

A good recent article

U.S. Treasury’s Mnuchin says tax refunds are flat from last year

By Susan Thomas and Jason Lange

WASHINGTON (Reuters) – Tax refunds to Americans so far in 2019 are flat compared to the same period last year, U.S. Treasury Secretary Steven Mnuchin said on Thursday.

Mnuchin, who was speaking at a hearing in the U.S. House of Representatives on Trump’s 2020 budget proposal, did not provide specifics on the dollar value of refunds made this year.

“Tax refunds are flat on last year”, he said.

Previously released Treasury data has showed the government has refunded $142.4 billion to taxpayers this year through March 1, down 3.5 percent from a year earlier. The average refund made, at $3,068, was 0.7 percent higher than a year earlier.

A soft trend for tax refunds could present a messaging challenge for the Trump administration, which has been touting a tax cut enacted last as a major boost to household finances.

While tax rates have fallen for most households, for some Americans their annual rebate is a palpable interaction with the tax code.

Mnuchin said refunds should actually fall when tax obligations fall. Many Americans pay more taxes than they owe over the course of the year. If they were able to estimate exactly what they owe and instructed employers to withhold just that, they would not get a refund at the end of the tax year.

“The fact that refunds are the same means in essence that people did not adjust their holding enough to take advantage of the tax act”, Mnuchin said, referring to the tax law enacted last year. “Because taxes are down refunds should be down.”

Basic Tax Math – Part 7 – State Taxation, Domicile and Your License

The place most travelers and tax practitioners stumble when dealing with multistate taxation, is separating the concepts of permanent residence / domicile and a tax residence. The two are entirely different yet frequently referred to synonymously because they are often at the same place.

A permanent residence is a legal concept, often referred to as one’s domicile. If you want to know someone’s permanent residence, just ask to see their driver’s license, car registration and voter registration. Each of these connections tie an individual to a state, and more particularly, a community within the state. The permanent residence, domiciliary state has the right to tax an individual’s global income regardless of where they earn it and how many days they spend within the state.

This concept of permanent residence and domicile spills into  the understanding of “residency” as it is applied to professional practice licenses. If a registered nurse holds a compact license, their primary license which grants the right to practice in other compact states is based on their permanent residence and domicile.  In granting this license,  it is expected that the nurse will continue to reside  in the state.  This is the reason so many state tax agencies and professional practice boards  share information with one another.  The licensing agency  checks a tax return as a way to confirm a taxpayer’s continued  residence in the state and right to hold a residence license – the state tax agency will use the roster of professional practice licenses  as an hunting/discovery tool tool to ensure that those  benefiting from residency in the state  are paying their share of taxes.

The cross-referencing of professional practice licenses and state tax returns started many years ago with California leading the way. Gradually,  it spread to almost every state in the nation.  About six years ago we did a survey  of every  nursing board  and state tax agency in the nation, asking whether they actively cross referenced data the for their own purposes. The answer was unanimous – they can and will when necessary.

This is why it is imperative for a multistate traveling professional  to file their state returns with the proper residency status. Every tax return leaves a cookie trail. When it comes to the states , the last thing you want is a series of annual returns that have no domiciliary consistency. Otherwise, the cookie trail can meander into the state taxation abyss where eager trolls endowed with the power to assess tax delinquencies await to harvest tax dollars from those that wander.

The Abyss

Basic Tax Math – Part 6 – State Taxation

While dealing with federal taxes is hard enough, anyone who works in more than one state has a greater challenge juggling all the different state tax returns.

How are taxes computed when you work in more than one state?  Well on paper,  it’s pretty simple, however, it is a great source of confusion for most.

The rules run like this : your home state will tax your global income  regardless of where you earned it and regardless of whether you earned any income in your home state. It doesn’t even matter if you were gone for an entire year and never set foot in your home state- the fact that you maintain a legal domicile in your home state is sufficient basis for that state to tax your global income .

At the same time,  when you work in  another state and labor on its soil,  that state has the right to tax all of your income earned within its borders.

Now.  Are you being taxed twice on the same income?  Yes.  But, there is relief.  Your home state is obligated to give you a credit for the tax that you pay to the work state on the same income . Many states will call this,  “credit for taxes paid to other states”.

To illustrate:  say you live in a state that has a 5% tax . You work a temporary assignment in a state that has a 2% tax. Since the tax you pay to the work state is less than the tax you would pay to your home state on the same income, you will have to make up the 3% difference.

Let’s look at this illustration in reverse : say you live in a state with a 2% tax and work temporarily in a state that has a 5% tax. Since you pay more to the work state than you would in the home state, there is nothing due to the home state, since the credit brings the tax liability for that income to zero.

I will explore other nuances of multistate taxation in later posts.

Basic Tax Math – Part 5 – How Withholding is Calculated

As mentioned in Part 4, the amount withheld for income taxes is based on the data you provide on Form W4 and the state equivalent – if any. How is the actual amount determined from this data?

The withholding “formulas” start with the rate of earnings for each individual paycheck extrapolated to an annual amount. Assume you are paid bi-weekly, which is 26 checks per year. If you make $2K in the biweekly pay period, the withholding formula starts with the assumption that you make $52,000 a year. Based on $52K a year, the formula then calculates the amount of tax that someone who is say “Single with 2 exemptions” (as you note on your W4 form) would be liable for on that amount of annual income. It then divides that amount by 26 to get the amount to be withheld from your paycheck.

If you work overtime, the annual wage base used in the formula is increased and so is the required withholding for that level/rate of income. Conversely, if you work less than full time in a payroll cycle, the withholding will be based on a lower annual rate of earnings as determined by that isolated pay period rather than the amount needed had you worked a full week of wages all year.

With this in mind, you can imagine what happens when a tax payer works multiple jobs with different rates and hours. Working a part time job results in less withholding by percentages on those paychecks than a job with full time hours. Since your tax is based on an annual “pot” of earnings, all of the withholding must aim for the withholding that will cover total wages for the year. It may be necessary to request withholding at the “single” rate despite the fact that you may are married. The W4 form doesn’t declare your marital status, it just allows you to set your withholding at a higher rate by using a different filing status, exemptions and specified additional amounts with each check.

Basic Tax Math – Part 4 – Why Do They Tax $X Out of My Check?

The short answer is ………. you told them too!

Seriously

Now don’t get the bright idea that you can tell them to withhold nothing (called declaring exempt) and wait till the end of the year and pay it at once either. That amount they take out – the “withholding” that we discussed in the earlier posts – is an estimated tax payment based on your income. Remember, it is not the TAX, it is your ESTIMATED payment.

You cannot change withholding for SS and Medicare as that is a flat rate and technically not an income tax – it is an employment tax. However, the Federal and state withholding is yours to determine. Remember that W4 for you had to fill out declaring your marital status and the number of exemptions you are claiming? That document determines your Federal withholding AND most of the states use it.

Some states like CA and AZ have their own form. AZ doesn’t go by marriage and exemptions –  it wants you to tell them the percentage of your gross to withhold. CA follows the Federal marriage and exemption format but with its own twist and there are a few others that require their own form.

In the next post we will discuss how to fill the form out.

Tax Headache

Basic Tax Math – Part 3 – What is “Withholding”

When you receive a paycheck, you will see amounts “withheld” from your wages for Federal and State income tax and for Social Security / Medicare. Sometimes these are coded with acronyms like FIT, Fed W/H, S W/H, FICA, Med etc. Regardless of the label, it is an amount withheld from your wages for  estimated tax payments.

If it was not withheld, you would have to write a check to the IRS, Social Security and the State Tax Commission with each paycheck. Withholding makes it simple but is removes the pain of having to actually write the check and appreciate how painful it really is.

Withholding for Social Security and Medicare is set at 6.2% and 1.45% – This withholding is the actual employment tax, so there is never an excess amount taken from your pay unless you have more than one job and make something over 120K between the jobs.

The Federal and State Withholding are ESTIMATED payments based on the W4 form that you complete with your employer. Most states use the Federal W4 form to determine their withholding, but some like AZ and CA have their own.

Since WITHHOLDING is an estimated payment and not the actual tax, one can overpay their tax obligation during the year. When that happens, the taxpayer receives a REFUND when they file their return. If the withholding is too LOW for the income, the taxpayer will OWE on their tax return.

WHT%20tax%20image

When someone works overtime or gets a bonus, the withholding % is higher than the regular pay due to reasons that I will discuss in later blog posts. When someone says that they are TAXED more when they work overtime or receive a bonus, they show that they misunderstand the system. The WITHHOLDING is more. WITHHOLDING is not the TAX. It just estimates the TAX due for the income earned on the paycheck. The actual TAX is determined when you file your annual tax return.