Your paycheck may be going up soon because of tax cuts
Millions of working Americans should start seeing fatter paychecks as early as next month, Republican leaders say, as a result of the recently passed tax law.
But the precise timing hasn't been fixed yet. And some employees should be aware that less money withheld doesn't necessarily mean that their tax burden will shrink next year.
The massive Republican tax legislation, signed into law last month by President Donald Trump, kicked in Jan. 1. Billed as a huge benefit for the stressed middle class, it brings the biggest overhaul of the U.S. tax code in three decades, reaching into every corner of American society and the economy. The $1.5 trillion package provides generous tax cuts for corporations and the wealthiest Americans, and more modest reductions for middle- and low-income individuals and families.
A look at how working taxpayers could be affected:
WHAT ABOUT THOSE FATTER PAYCHECKS?
That was the promise from the Republican architects of the tax plan. Deflecting criticism of the deeply unpopular legislation, they insisted Americans will come to love the new tax law when they see their heftier paychecks this year — with less money withheld in anticipation of lower income taxes.
"In February, look at your paychecks, because you'll see the tax relief we delivered," said Rep. Kevin Brady, head of the tax-writing House Ways and Means Committee.
The Internal Revenue Service says employees could see "changes" in their paychecks as early as February. The agency first has to issue the new withholding tables for employers, reflecting the changes in tax rates for different income levels under the new law. That's expected to happen sometime this month to give companies and payroll service providers — and their computer systems — time to adjust. Such a massive, universal change feels something like turning around an aircraft carrier.
In the meantime, the pre-Jan. 1 tax rates and withholding amounts will continue to apply.
OF COURSE IT'S COMPLICATED
The IRS is "overwhelmed" by the changes in the complex new law and now is trying to get out the most important information first, said Melissa Labant, director of tax policy and advocacy at the American Institute of Certified Public Accountants.
"The withholding tables are at the top or near the top of the list of priorities," she said.
She asks employees to be patient. One thing they can do: Consider updating their Form W-4 "employee's withholding allowing certificate," filed with their company, to make sure their information is up to date. Labant advises that should only be done, though, after the IRS updates the Form W-4 — also timing unknown.
Taxpayers can also use the form to request that their employer withhold additional taxes. That may make sense if, for example, they have substantial outside income such as interest, dividends or capital gains on the sale of assets or investments.
The tax cuts for corporations under the new law are permanent, while those for individuals and families expire in 2026.
Nonpartisan tax experts project that the law will bring lower taxes for the great majority of Americans, though not all.
But reduced tax rates don't necessarily mean a lower tax bill for 2018. The new law is complicated. There are significant limitations on long-cherished deductions, such as the federal deduction for state income, property and sales taxes. There are new tax credits but other mainstays — like the $4,050 personal exemption — are gone. The standard deduction is doubled, to $24,000 for couples, but that means it no longer makes sense for many people to itemize and claim other deductions.
That also means employees can't assume that the new, lower withholding rates will cover everything they owe Uncle Sam for this year.
NEXT YEAR'S RECKONING
Taxpayers won't file their 2018 returns until next year, in accordance with normal procedure. That's too late for taxpayers to have refunds in hand, or checks paid to the IRS, under the new law before they vote in the midterm elections this November. Trump and the Republicans are counting on the tax law to give them a boost in the elections.