The IRS took one of its first steps to institute an overhaul of federal income tax that reflects changes introduced by the Tax Cuts and Jobs Act (TCJA) by issuing 2018 withholding tables that indicate how much employers should withhold from employees’ paychecks to satisfy workers’ tax obligations.
The new tables may provide correct tax withholding amounts for individuals with simple tax situations; however, they could also result in other taxpayers having too little withheld to pay ultimate tax liabilities under the TCJA.
New Withholding Tables
The revised IRS withholding tables reflect the TCJA’s increase in the standard deduction, suspension of personal exemptions, and changes in tax rates and brackets.
For 2018, the law approximately doubles the 2017 standard deduction amounts to $12,000 for single filers and $24,000 for joint filers. It also eliminates personal exemptions, which taxpayers could previously claim for themselves, their spouses, and any dependents. In 2017, the individual personal exemption amount was $4,050. 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 based on 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. In other words, employees don’t need to complete new forms or take 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 February 15, 2018. They should continue to use the 2017 withholding tables until they adopt the new figures.
More Scrutiny Needed
The IRS expects many employees will see increases in their paychecks after the new tables are instituted. However, it’s possible some taxpayers could experience bigger income tax bills when filing their 2018 tax returns. That’s because the TCJA—in addition to cutting tax rates—eliminates or restricts many popular tax deductions those taxpayers have claimed on their returns in past years.
For example, beginning in 2018, taxpayers who itemize can claim a maximum aggregate deduction of $10,000 for state and local property taxes and income or sales taxes. These taxpayers can also deduct mortgage interest on debt of only $750,000 ($1 million for mortgage debt incurred before December 15, 2017).
Taxpayers can’t deduct 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 offset the loss of these and other deductions, but taxpayers won’t know until they prepare their 2018 returns in 2019.
The IRS cautions that people with more complicated tax situations could have their income taxes underwithheld. Taxpayers can review their tax situation and adjust their withholding allowances if they:
- Itemize their deductions
- Are married with multiple incomes
- Have multiple jobs per year
Taxpayers are responsible for alerting their employers if any adjustments need to be made. This can help prevent under- or overwithholding of taxes from their paychecks.
An updated withholding calculator to help taxpayers review their situations should be available on the IRS website by the end of February 2018. The calculator will reflect changes in the following:
- Available itemized deductions
- Increased child tax credit
- New dependent credit
- Repeal of dependent exemptions
Beyond Income Taxes
Paychecks are also subject to withholding for nonincome taxes. Specifically, wages are subject to withholding for Social Security and Medicare taxes, known as Federal Insurance Contributions Act (FICA) taxes.
For 2018, the employee’s share of taxes is as follows:
- Social security tax is 6.2% of the first $128,400 of taxable earnings.
- Medicare tax is 1.45% of all taxable earnings.
- Medicare surtax is 0.9% for taxpayers with taxable earnings of over $200,000 for individuals or $250,000 for couples.
We’re Here to Help
Given the tax law overhaul enacted by the TCJA, those who rely solely on the new withholding tables may run the risk of under- or overwithholding on their taxes. They could also be subject to far greater taxes—plus penalties—when filing their 2018 tax returns.
If you’d like more information on how this new guidance may affect you, contact your Moss Adams professional. You can also visit our dedicated tax reform page to learn more.