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  • Writer's pictureSteven Lee

"What Happened to My Refund?"

Many Americans are just now seeing changes to their tax situations as a result of the Tax Cuts & Jobs Act (TCJA) passed by Congress and signed into law by President Trump in 2017. The last time our tax code saw such significant change was back in 1986, more famously known as the second tax reform within the "Reganomics" plan. If you are asking yourself about your 2018 tax year refund, here are some points worth noting (NOTE: this is for purely educational purposes and in no way constitutes tax advice).

Is it really a refund?

Unfortunately, America in general tends to possess a short-term memory. This is evident by our cyclical bewilderment regarding why Presidential nominees who won the popular vote somehow lost the race. In a similar vein, we often think favorably about the check often worth thousands that we receive from Uncle Sam each year. In a sense, it is a refund; That is your money that was taken out of your paycheck and sent directly to the government by your employer. However, it would be more accurate to say that it's your return of principal from the bi-weekly, interest-free loans you gave to the government throughout the year. What happened with the TCJA is, for many people, less money was withheld from the paycheck, which meant less settling-up at the end of the tax year. Of course, this isn't true for everyone. Some people owed money again because of the withholding amounts relative to the tax owed. Aside from adjusting your withholding (for which you should consult both your employer's Human Resources manager as well as your tax professional), there are some things that you can (and probably should) do to lessen your overall tax burden.

Start a business

Especially in a post-TCJA America, this is probably the single biggest difference you can make regarding your tax situation. Before the TCJA, you could write-off any alimony you paid to your former spouse, moving expenses for which your employer did not reimburse, and casualty and theft losses. If you itemized pre-2018, you could write-off various miscellaneous expenses that surpassed 2% of your adjusted gross income (AGI) including investment expenses, tax preparation expenses, and unreimbursed job expenses (union dues, travel, education, etc.). Not anymore with the newest tax legislation.

You will see a pattern with the latest tax code changes: the targeting of W-2 employees. People often consult me before seeking specific advice on tax or legal matters. I urge them to ask their CPA, EA, or attorney about the easiest way to start a business and incorporate that new business into their current tax situation. The business can be literally anything for which you expect to earn income so long as it isn't a hobby (which is more for enjoyment with the possibility of generating income). Consulting, tutoring, driving for Uber or Lyft, nearly anything can be a business. You can easily form a sole proprietorship. This is a business type that offers no protection from liability and the income and expenses flow directly through the business to you and are reported on Schedule C of your Form 1040 tax return. It is recommended (but not required) to obtain a separate tax identification number from the IRS. Additionally, there are numerous resources to help you launch your business such as the Small Business Association.

The benefits for self-employed persons are numerous. First, you can be self-employed running your business and be a W-2 employee. This gives you the fringe benefits (insurance, flexible spending account, retirement plan, etc.) of your current employer as well as giving you the benefits of being an independent contractor. These other benefits include being able to write-off most business expenses (home office expenses, business supplies and equipment, travel and business meal expenses, vehicle expenses used for the business, etc.). Business profit/loss was a separate line item on the tax return but is now built into the AGI calculation. Your AGI is important because many government programs and features in the tax code rely on your AGI, so the more you can reduce that number, the better. A third benefit is the automatic 20% deduction of any flow-through income (including from a sole proprietorship business). This means that if Person A is a W-2 employee and Person B is self-employed and owns a sole proprietorship, and both make $100,000, Person B effectively (through the TCJA) made only $80,000 for tax purposes. That's a huge difference! Because it's multiplicative, the more you make, the bigger difference it is.


For many people (especially W-2 employees), if you are scrambling in April trying to find ways to lower your tax bill for the preceding year, it is probably too late. There is very little you can do in hindsight, though you can still contribute to plans such as a 401k, individual retirement accounts (IRA), or health savings accounts (HSA) prior to tax day (April 15), but these are costly because the money goes into accounts that have various strings attached, meaning accessing the money for non-qualified expenses will incur penalties. As part of starting a business (or if you are fiercely opposed to doing so), planning your taxes beforehand is always better than waiting until after the tax year is over. It is easier to set-up itemized deductions such as buying a home, incurring medical expenses, or making charitable contributions with proper planning. Make time to do this just like you do with the household budget, managing your investments, and reviewing your insurance policies. Most of the heavy lifting will be done in the early planning stages. Once the major parts of your overall financial plan have been implemented, maintaining that plan will require significantly less time barring any major changes to your circumstances.

Why your tax preparer never told you this

To be charitable, tax professionals, like so many other specialized careers, offer advice on (to use a military term) actionable intel. The tax code is four MILLION words long, and tax preparers do not have the time to ask you every possible question that could potentially apply to your situation--they just don't. Unless you are going to pay an hourly retainer to your CPA (whom could easily bill between $100 to $500 per hour or more), then you should expect the "standard" treatment. This isn't bad, it's just that, given your broad situation (household income, net worth, whether you own real estate, etc.), the tax preparer will narrow-in on what is most likely needed in your situation. Similarly, the human body is so complex that many medical professionals will fail to correctly diagnose an ailment the first time around. It's unfortunate, but it happens, and this is because life is too complex to construct simple flow charts that cover every base and circumstance. In addition, many people forget or choose not to volunteer vital information that would significantly alter the advice offered by the professional. I've had clients, for instance, that didn't tell me they had a retirement plan until a year into the engagement! Well, if you have a retirement plan, the advice I offer you will probably differ substantially than if you do have a retirement plan.

There is no substitute for planning when it comes to finances--your tax situation especially. Unlike other aspects of your financial life, taxes impose strict deadlines and afford very few exceptions. If you want to lower your tax bill for the 2019 tax year, consider starting a business, plan ahead, and always consult your tax professional.

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