Most people expect that the tax bill approved by Congress and signed by President Trump in December will have an impact on their paychecks in 2018. The Internal Revenue Service just issued the new withholding tables for 2018. According to the IRS, taxpayers should start seeing changes to their paychecks by Feb. 15. (For more see: Understanding the U.S. Tax Withholding System.) So how big a change should you expect and will you bring home more?
What Will Change
The legislation makes significant changes to the tax code, including new lower tax rates for most individuals and for corporations, the elimination of personal exemptions and a doubling of the standard deduction. For most taxpayers this means the amount withheld from their paychecks will go down, resulting in more take-home pay, beginning as early as February.
What Won’t Change Right Away
Until they incorporate the new withholding tables, employers and payroll service providers will continue using existing 2017 tables and rely on information from your current W-4 form. This means your pay in January won’t change. You don’t need to fill out a new W-4 or other paperwork at this time. In fact, according to the IRS, the new withholding tables will be designed to work with existing W-4 forms until a new W-4 becomes available.
Expect a Modest Pay Bump
The amount of your tax cut will depend on your income and individual tax situation, but most people will see at least a modest increase in take-home pay. A tax reduction of $1,000, for example, would result in an increase of roughly $80 per month.
Remember, you won’t see this increase until at least February. The IRS released the new withholding tables on Jan. 11. "Employers should begin using the 2018 withholding tables as soon as possible, but not later than Feb. 15, 2018," the agency declared in the notice announcing the release. (For details on what to expect, see How the GOP Tax Bill Affects You.)
Since withholding will be at old rates at first, you can expect to have too much withheld from your pay in January. Some (larger) employers will begin withholding at the new rates sooner than other (smaller) companies due to their ability to retool operations faster. Depending on your employer, you could have too much withheld into February or even longer. The inclusion of exemptions on the old W-4 form could also result in the wrong amount being withheld temporarily – something the IRS says it may address in the new tables. Fortunately, when you calculate your taxes for 2018 (in 2019) any extra withholding would result in a refund.
Payroll Taxes, State and Local Taxes
Payroll taxes including Social Security and Medicare will not change with the new law. Changes to the federal tax law don’t impact withholding by states or local municipalities either. Some states accept the federal W-4 form and some have their own form. If your state (or city) allows exemptions, that won’t change under the new law and neither will the amount withheld. (For more read: How do I determine what to pay in taxes if my employer doesn't withhold payroll taxes?)
Withholding vs. Tax Liability
It’s important to remember that the amount withheld from your pay is not necessarily the amount you will owe in April 2019. Once a new W-4 form, along with new instructions, is issued sometime in 2018, you will likely be required to fill one out. Until then you shouldn't need to adjust your withholding unless you suspect a big discrepancy between the amount being withheld and your likely tax liability for 2018. (You can use one of many available online tax calculators to calculate your potential 2018 tax liability to see if this might be a problem for you.) The IRS' tax calculator is being recalibrated; it's worth checking your withdrawals after you get your new paycheck to make sure enough (but not too much) is being withheld. The new calculator and form W-4 should be available by the end of February, according to the IRS.
The Bottom Line
Experts urge patience more than anything else. Allow time for the IRS to release new withholding tables and for your employer to comply. Remember that you may not see changes to your paycheck until February and in some cases even later.
If all goes well, eventually your take-home pay will go up, and at the end of the year, your taxes will likely be lower. (You may also want to read: How to Owe Nothing on Your Federal Tax Return.)