If you normally start thinking about taxes in early April, you may want to accelerate your thinking this year. The tax law approved by Congress in late December will change withholdings for about 90 percent of American employees, meaning more take-home pay.
You should see a boost this month, if you havenâ€™t already. Congress set Feb. 15 as the date for employers to comply with the guidelines. Before you start madcap spending, however, exercise a little caution.
The new tax withholding tables factor in your annual income, paycheck frequency, your tax-filing status, your tax bracket and the number of dependents you claim. These components determine the appropriate amount your employer withholds from your pay for federal income taxes.
Whatâ€™s the Bottom Line?
You can always check your first pay stub that reflects the changes and compare it to your previous take-home pay. Or, hereâ€™s a formula for determining how much your pay may change under the new law
- Find a recent pay stub and note how much was withheld from your pay for federal taxes.
- Look at the Notice 1036 IRS form to find the new withholding amount for each deduction. The formula is based on your pay frequency (weekly, biweekly, monthly, etc.). Calculate your total withholding by multiplying the withholding amount times the number of dependents you claim.
- Subtract this number from your current withholding amount per pay period. This is how much your paycheck could increase.
What Else Is New?
- The right amount: The new withholding tables may result in not enough money withheld from your pay to cover taxes owed, meaning youâ€™ll need to write a check to the government when the April 15, 2019, tax deadline looms. Thatâ€™s never fun. But the changes could result in too much withheld from your paycheck, meaning youâ€™re shorting yourself on your take-home pay. If the government withholds too much, youâ€™ll get a refund. But youâ€™ll be giving Uncle Sam an interest-free loan, which may not be the best money management strategy. Your employer probably wonâ€™t advise you what to do, but you can use the IRS tax calculator to get a good estimate of the taxes youâ€™ll owe. Then update your W-4 form on file with your employer to change your withholdings, if you see the need.
- Tax calculator: The IRS is revising the tax withholding calculator on IRS.gov. This tool also should be available by the end of February. When itâ€™s ready, you can use the new calculator to better determine your correct withholding.
- The W-4 form: The form that employers use to determine your tax withholdings has not yet changed because of Congressâ€™ rush to implement the new tax law. A new W-4 is expected to be ready by the end of February.
- Other changes for 2018: The only difference for now is that tax withholdings change, starting at least by mid-February, which most likely means more take-home pay. Other tax changes approved by Congress take effect in 2018, but you wonâ€™t need to make those calculations until tax time in 2019. So for the 2017 tax filing period with a deadline of April 15, 2018, itâ€™s pretty much business as usual.
- Standard deductions: The new tax law changes standard deductions starting in 2018. For singles, the deduction nearly doubles to $12,000; and for married couples who file jointly, the standard deduction increases to $24,000. So you may not be eligible to itemize deductions in future years.
- Child tax credit: The new tax bill doubles the credit from $1,000 to $2,000 for children under age 17 starting in 2018. If your children are 17 or older, or if you take care of elderly relatives, you can claim a $500 credit starting this year.
- Education tax breaks: If you have funds saved in a 529 college savings plan, you can use them for levels of education other than college starting this year. The money in this account can also cover private school tuition or tutoring for your child in grades K-12.
- Enjoy it while you can: Nearly all of the tax cuts for households expire afterÂ 2025, while the tax cuts for corporations are permanent.
What Should You Do Now?
Save it: Solid advice from tax experts is to save any extra take-home pay until youâ€™re sure the government is withholding enough to cover your taxes, to avoid an unpleasant surprise at tax time in 2019.
Do the math: Mark your calendar for a status check in June or July 2018 to estimate the amount of taxes youâ€™ll owe for the entire year, using the IRS tax calculator. Then adjust your withholding, spending or saving accordingly.
A final note: Weâ€™re not done yet. Watch for more tax law changes promised by Congress in 2019.
7 Simple Ways to Save Money on Taxes This Year
April Awareness: Taxes and the Strengths of Stress