You are joining us with more news following the recent tax bill. What has happened now?
Last week, the Treasury Department released new guidance and withholding tables for employers that will directly impact how much your employer withholds from your paycheck for taxes. Under those new tables, the Treasury estimates that 90% of people who get a paycheck are likely to see more in take-home pay, as soon as February.
Employers will have Feb. 15 to incorporate the changes in their payroll systems. This is certainly good news for many Americans, but there are a few things to keep in mind before celebrating.
First things first: why is the Treasury Department making these changes?
Let’s start with the technical argument. The current withholding calculation is based largely on the personal exemption. However, the new law repeals that exemption in favor of a larger standard deduction, while shifting tax savings and other exemptions around, including limiting the state and local tax deduction to $10,000 per return, increasing the child tax credit and changes the tax brackets and income thresholds. The Treasury Department argues that it is simply working to implement the new bill accurately.
However, many view this is an effort to have taxpayers feel the effects of the bill faster. While Congress passed the tax bill last month, and most of the cuts went into effect on New Year’s Day, most taxpayers would not have filed their taxes until and seen the benefits until early 2019. The changes in withholding will deliver some of those benefits now.
How much more can workers expect to see on their paystubs?
While most taxpayers are expected to get more money back each pay period, the amount will be dependent on your current W4 form and your income. What we do know is that the Treasury Department’s changes work with your existing forms—the W-4—so the changes will go into effect without workers doing anything.
The government is expected to release a calculator tool in February that will allow us to estimate the changes to our paychecks. More extensive changes to the withholding system are in the works at this point, including new W4s that many employees will need to file for 2019.
Is there a catch? What should we watch out for?
There are a couple of things about this change that concern me. Most Americans – around 75% – have more money withheld from their paycheck than necessary. That means that most of us are used to getting a tax refund – on average around $2,800 back – after we file our taxes in the spring. In fact, it has become common for many Americans to expect that refund, which can function as a method of forced savings, or in some cases as an expected windfall that we can count on.
The changes to withholding are likely in many cases to reduce the number of taxpayers who have too much money withheld, and therefore reduce the number of taxpayers who receive a refund. And, if you are not careful, it could mean that the new calculations will mean that instead of a refund, you will have to cut a check to Uncle Sam come April 2019, instead of investing a refund you were expecting.
What should we do to ensure we are not caught unprepared in April of 2019?
You should take time to review your W4 form in the coming months to make sure you’re deducting the correct amount of taxes under the new legislation. Many of us have used the same W4 form since we started our current job! Given all of the changes to the tax code – some deductions have been eliminated, others have been increased – there is a possibility the amount withheld from your paycheck will shift.
As I mentioned, the Treasury Department and the IRS expect to have a calculator tool out in February that will help you understand and plan for the new tax bill. Use it, and then speak with your human resources department at work to make sure that you are covered come 2019.
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