The US Treasury Department has updated its rules for tax withholding from paychecks, changing calculations, so most workers will start getting more take-home pay in February as a result of the recently passed tax law.
The IRS has issued the first set of guidelines determining how every American’s paycheck will change following the tax-cut bill President Trump signed in late December. The guidelines go to employers and payroll processors, which will then adjust the amount of tax withheld from workers’ paychecks. The government estimates that more than 90% of workers will have bigger paychecks under the withholding changes, and it says employers should implement the changes by mid February.
According to reports, a net drop in tax withheld in each of 11 income categories, which means paychecks would get larger in each of those income categories. For a worker earning $60,000, which is roughly the national median income, the net savings would be $112 per month, or $1,344 per year.
The major changes affecting individuals include new tax brackets, (mostly) lower income tax rates, a near-doubling of the standard deduction and the elimination of both personal exemptions as well as many itemized deductions.
The new tables are designed not only to best approximate the change in workers’ tax liability under the new law, but to do so in a way that “delivers benefits as soon as possible to as many people as possible with as little disruption as possible,” a senior Treasury official told reporters.
The IRS is not issuing new Form W-4s … yet. “We’ve constructed the tables so that most people should be accurately withheld if they leave their W-4 in place,” a senior IRS official noted. The plan is to have new W-4s by 2019. Personal exemptions are a core feature of the current withholding system, but now that they are eliminated, “it’s necessary to build a new approach to withholding, which will take some time,” the senior IRS official said.
In the meantime, he urged filers who have complicated tax situations — i.e., anyone who is not single, childless and holding down just one job — to review the number of allowances they currently take on their W4s once the IRS puts out its new withholding calculator by the end of February.
Such a calculator will ask for anonymous inputs — for example, your income, number of dependents and other pieces of information that help determine whether you might be eligible for various tax breaks.
“We would encourage every taxpayer to run their information through the calculator. Then they can decide what they want to do,” the senior IRS official said. That’s not bad advice for any year when there are big tax changes but it’s especially critical this year.
Most people fill out their W-4 form when they’re hired at a new job and don’t change it unless they get married, have kids, get divorced or experience other life-changing situations.
And roughly three-quarters of tax filers are overwithheld because they take too few allowances. And that results in a refund when they file their tax returns. The IRS doesn’t expect that to change much under the new tax law given the preference filers have shown for getting big refunds, rather than just breaking even or having to cut a new check to Uncle Sam when they file their returns.
“Republicans are using brute force and speed to implement a law that will deliver a financial blow to hardworking Americans all across the country,” Sen. Ron Wyden, the top Democrat on the Senate Finance Committee, said in a statement.
Earlier this week, Wyden and Rep. Richard Neal, the top Democrat on the House tax-writing committee, asked the Government Accountability Office to analyze the new IRS tables to see if they might lead to systematic underwithholding of federal taxes from paychecks.
Some experts worry that mistakes by the IRS or employers could lead some taxpayers to underpay in 2018 and end up with too little taken out of their checks in 2018 to cover their total tax bill. “I look forward to GAO’s independent review of these tables, which will expose whether the Trump administration is tampering with Americans’ paychecks, resulting in a whopping tax bill next year,” Wyden said.
Treasury Secretary Steven Mnuchin at the White House press briefing on Thursday dismissed suspicions that administration is “juicing” the tables as a “ridiculous charge.” This is a simplified analysis that doesn’t account for pre-tax deductions of other provisions that affect many workers’ take-home pay. It’s also important to note that the increase in net pay that shows up on all 2018 paychecks won’t necessarily be the same thing as the total change in a worker’s tax bill for 2018.
The Trump tax law changed many things. One of those changes was the withholding tables, which determine what tax rate applies to what level of income. The new law lowers the tax bracket for many (but not all) workers, which is why many people’s paychecks will get larger.
But the law also axed some key tax breaks, such as the personal exemption, while doubling the standard deduction for most people. For families with fewer than three dependent kids, that’s probably a net gain. But for larger families it could push up their taxable income and their total tax bill. The law also caps the total amount of allowed deductions for state and local taxes at $10,000, which will amount to a big hit for some taxpayers with high income, property or school taxes at the state and local level.
Employers are likely to start changing the tax withholdings by mid-February, which means workers will see the change in their paychecks within weeks. Republicans who passed the tax bill, with no support from Democrats, hope voters will reward GOP politicians for their largesse when midterm elections arrive next November. But Democrats are sure to point out that some wealthy earners will save millions while the middle-class tax cuts are modest. Voters will have to decide how much they like free money.