A few weeks ago, Jeff wrote about a number of the changes resulting from the new tax law, the Tax Cuts and Jobs Act. This week, I am going to focus on those aspects of the new law that might affect your paycheck. Among other things, the new law repeals personal exemptions, increases the standard deduction and changes tax rates and brackets. It promises to allow many taxpayers to keep more of their paychecks than they did before.
As you may recall, Congress went down to the wire to get the new tax reform bill passed. The President signed the new bill into law right before D.C. lawmakers went on holiday break. That’s left the IRS, payroll services and businesses scrambling to implement some of the changes brought on by the new law.
As many of you know, taxes are withheld from a wage earner’s paychecks and sent directly to the federal government. The goal is to withhold (throughout the year), at least 90% of the tax ultimately due in April from an employee’s paychecks. Employers and payroll services use IRS Form W-4 and Income-Tax Withholding tables to help them calculate the appropriate amount of tax to be withheld. This calculation is based on wages, marital status and the number of withholding allowances claimed.
In mid-January, the IRS published new income tax withholding tables that reflect changes in the tax rates and brackets, as well as the repeal of personal exemptions and the increase in the standard deduction. Employers and payroll services are encouraged to use these new tables as soon as possible, but no later than February 15, 2018. Employees should start seeing potential changes in their paychecks soon after that, depending on their pay period/frequency of pay.
Although Form W-4 will be updated as well, it has not been yet. Therefore, the tables the IRS has revised are designed to work with existing Form W-4s that employees have already filed with their employer.
Those new tax withholding tables are provided primarily for use by employers and payroll services. However, employees can also use them to figure out how much to withhold, if they wish. The IRS also provides a withholding tax calculator, to help employees decide what elections they should be making on their W-4s. This calculator typically lives on the IRS website, but is not currently available. The IRS took it down when the new tax law passed to make adjustments for the changes. It anticipates revising that calculator by the end of February.
If you are trying to figure out how much to withhold, remember that the goal is to withhold at least 90% throughout the year, of the tax you will ultimately owe. If you withhold less than you should, you could be left with a big tax bill you are not expecting at the end of the year; one that could include penalties. The IRS recommends that taxpayers with complicated filing situations be especially vigilant. Examples include if you claim many allowances, if you or your spouse are both working or have more than one job, or if in the past you have itemized deductions that have been eliminated under the new tax code. If any of those situations apply to you, it’s a good idea to run the numbers once the new withholding calculator is available, to make sure you’re not going to get dinged when you file your return next year. (Even after any adjustments are made due to the new law, you should update your W-4 whenever your tax situation changes; for example, after getting married or having a child.)
Most taxpayers err on the side of caution, either by accident or intent. And as a result, too much ends up being withheld, which can lead to a big refund when taxes are filed. In fact, the average refund, according to the IRS, is $3,120. Therefore, many taxpayers have developed the expectation that they are going to get a nice little “bonus” at tax time every year. Some use it to pay down debt. Some use their refund to buy themselves or their family a big-ticket item. Some use it for vacation plans.
But remember that withholding more than you should is not ideal either, even if you get a bigger refund when you file your return. Think about it for a moment: That’s no bonus. It is your money being returned to you. The money you have given the government throughout the year, for what amounts to an interest-free loan. Would you give anyone else (other than maybe your kids) an interest-free loan? That’s money you could be using to pay your monthly bills, to pay down debt, or even to move into tax-deferred retirement savings plans.
That’s your money, and it can work better and smarter for you throughout the year. And although the additional amount you may see in each paycheck if you reduce your withholding may not seem significant, it adds up, especially if you it wisely. Consider how much you can save in interest if you use the additional money in your paycheck to pay down debt, or what that money could earn if it is invested.
Once the IRS has all its ducks in a row with the new withholding calculator and once your employer is on board with the new changes, examine your paycheck, and run the numbers. Then make any adjustments as necessary. One thing you should not do is assume that everything is good. The new rules represent the most significant changes to income tax law in 30 years. Don’t wait until you file your 2018 taxes to find out that you withheld too much or too little this year. And remember, try to break even every year.
As Jeff always tell you, be vigilant and stay alert, because you deserve more.
Have a great week!
Susan Roman is an Investment Advisor Representative at Cutter Financial Group, LLC, with offices is Falmouth, Duxbury, and Mansfield. Cutter Financial Group provides private wealth and investment management advice incorporating low risk, low volatility financial strategies. Susan can be reached at firstname.lastname@example.org.
Cutter Financial Group LLC (“Cutter Financial”) is a registered investment advisor.
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