In the wake of the Tax Cuts and Jobs Act (TCJA) becoming law in late December, the IRS has taken one of the first crucial steps in implementing the overhaul of the federal tax system. They’ve issued updated withholding tables that specify how much employers should hold back from their employees’ paychecks to satisfy workers’ tax obligations. Although the new tables may provide the correct amount of tax withholding for individuals with simple tax situations, they’ll likely result in other taxpayers not having enough withheld to meet their ultimate tax liabilities under the TCJA.
New withholding tables
The revised IRS withholding tables reflect the TCJA’s increase in the standard deduction, the suspension of personal exemptions, and changes in tax rates and brackets.
The law roughly doubles the 2017 standard deduction amounts to $12,000 for single filers and $24,000 for joint filers. It also temporarily eliminates personal exemptions, which taxpayers previously could claim for themselves, their spouses and any dependents. (The personal exemption amount for each such individual was $4,050 in 2017.) The TCJA also adjusts the taxable income thresholds and tax rates for seven income tax brackets.
Employers and payroll services use the withholding tables to determine the amount to withhold from employees’ paychecks considering their wages, marital status and number of withholding allowances. Employees provide this information on their Forms W-4.
The new withholding tables are designed to work with the Forms W-4 that employers already have on file for their employees, so employees won’t be required to fill out any new forms or take any other action at this time.
Employers, on the other hand, must incorporate the new tables into their payroll systems as soon as possible — and no later than Feb. 15, 2018. Until employers implement the new figures, they should continue using the 2017 withholding tables.
One major caveat
The IRS expects that many employees will see a paycheck increase after the new tables are instituted in February. However, when it’s time to file their 2018 tax returns, it’s possible that some taxpayers could be faced with a bigger income tax bill than expected. That’s because, in addition to cutting tax rates, the TCJA eliminates or restricts many of the popular tax deductions those taxpayers may have claimed in previous years.
For example, beginning in 2018, taxpayers who itemize can claim a deduction of no more than $10,000 for the aggregate of state and local property taxes and income or sales taxes. These taxpayers also can deduct mortgage interest on debt of only $750,000 ($1 million for mortgage debt incurred before Dec. 15, 2017) and can’t deduct any interest on home equity debt, even if the debt existed before the TCJA was enacted. The higher standard deduction and expansion of family tax credits may well offset the loss of these and other deductions — as well as personal exemptions — but taxpayers won’t know for certain until they prepare their 2018 returns in 2019.
The IRS warns that people with “more complicated tax situations” face the possibility of having their income taxes underwithheld. If you itemize your deductions, are married, and you and your spouse have multiple jobs, or if you have more than one job per year, you should review your tax situation and adjust your withholding allowances as appropriate. Note that it will be the taxpayer’s responsibility to alert their employer of the need to make adjustments to avoid the under- or overwithholding of taxes from their paychecks.
The IRS is updating its withholding calculator (available at irs.gov) to assist taxpayers in assessing their situations, and they expect the new calculator to be available by the end of February. The calculator will reflect changes in available itemized deductions, the increased child tax credit, the new dependent credit, and the elimination of dependent exemptions.
Beyond income taxes
Of course, paychecks also are subject to withholding for non-income taxes. Specifically, wages are subject to withholding for Social Security and Medicare taxes (known as FICA taxes), too.
For 2018, the employee’s share of the Social Security tax is 6.2 percent of the first $128,400 of taxable earnings. The employee share of the Medicare tax is 1.45 percent of all taxable earnings. Taxpayers with taxable earnings of more than $200,000 for individuals or $250,000 for couples also are subject to a Medicare surtax of 0.9 percent.
Evaluate your situation sooner rather than later
If you’re subject to withholding, it’s advisable that you assess your tax situation soon by consulting with a tax professional or, as a starting point, utilizing the revised IRS withholding calculator once it becomes available. However, those who rely solely on the new withholding tables carry the risk of dramatically under- or overwithholding on their taxes. At best, that means they extend the federal government no-interest loans of their hard-earned income; at worst, they could end up on the hook for far greater tax liability — and potentially penalties — when they file their 2018 tax returns. If you have questions on how changes brought about by the TCJA will affect your income tax liability moving forward, please reach out to us.