Employers have until Feb. 15 to make the changes to reflect the new withholding rates. Chances are the new structure has lowered your marginal tax rate by a couple of percentage points.
But don't get too excited and rush to the mall with your new-found earnings. It's possible that other changes in the tax law, such as limiting or eliminating formerly deductible items, may cost you more in income taxes when you file your 2018 income tax return next year.
Deductions for property, state and local taxes are limited to $10,000 under the new tax law. Grand Haven CPA Calvin Meeusen said many people could be affected by this.
“I think it's the biggest one that's going to hit some people,” he said.
If you pay property taxes of $6,000, and state and local income taxes of $5,000, you will only be able to deduct $10,000 of the $11,000 you paid out.
“That's going to affect people who may have homes on the lake, without any question,” Meeusen said. “Some people have a second home. They're going to be affected. What remains to be seen is if the reduction in (tax) rates will offset the loss of that. It's going to affect different people differently.”
Meeusen said he's talked to a couple of clients who have seen increases in their weekly checks of $20 to $25. These people make between $60,000 and $70,000 per year, according to Meeusen.
“That certainly is a positive,” he said of the around $1,000 per year increase in net pay. “That puts more money in the consumer's pocket, period. They spend that money. Personally, I'd like to see them put more money in IRAs. But I think the jury is certainly still out yet on the overall tax effect.”
Because every situation is different, and everyone's deductions are different, it's impossible to predict how much more some people will see in their paychecks, Meeusen said.
“It's hard to put a number on, but I would say the majority of the people are going to see some sort of small increase,” he said. “It's going to depend on what your income is. The higher up you get, you're not going to see much.”
Meeusen said other former deductions missing from the landscape may also surprise people, such as the tax preparation fee, home equity loan interest and alimony.
Those obligated to pay alimony prior to Jan. 1, 2018, may still deduct it.
“If you are divorced this year, you can't deduct alimony,” Meeusen said.
The lower tax rates, larger Child Tax Credit and an increased standard deduction (almost doubled) are projected to reduce taxes for American workers and business owners by $180 billion in 2018, according to the Joint Committee on Taxation.
The new tax law is expected to add between $1 trillion and $1.5 trillion to the national debt over the next decade because of a decline in revenue.
H&R Block's Tax Institute gives an example of a married couple filing jointly with one wage earner making $90,000, with two children under age 17. In this case, the family would see around $61 extra in each semi-monthly paycheck because withholding would drop from $292 per check to $231.
A single person with no kids making $35,000 a year would see about $32 more in a semi-monthly paycheck, or $763 for the full year.
However, in both examples, and in any real-life scenario, if people are losing large deductions or exemptions, the additional money that shows up in the paychecks may not be enough to cover their tax liability when they file their 2018 tax return.
Bill Bassow, a Grand Haven-based CPA, said the paycheck increase could be a complete wash.
“They may see something in their paycheck, but come the end of the year, the result may not be particularly positive,” he explained. “I think if we're following the national news and what's been said already, most people aren't seeing any kind of significant increase in their take-home pay, generally speaking. Depending on their individual situation, with the elimination of personal exemptions, a family of four may not see a significant increase in their tax savings.”
For example, a family of four who had $14,000 in itemized deductions and $16,000 worth of exemptions for four people would now have a $24,000 standard deduction.
People with higher incomes and no children may come out further behind when they prepare 2018 taxes.
Bassow suggests projecting your tax liability for 2018 now, and adjusting your W-4 with your employer accordingly.
“They should be talking to their (tax) preparer about this and not just looking at their paystubs,” he said. “There have been numerous articles where individuals have looked at their check and got a net increase of $1.50 per pay period. A lot of people are not seeing a significant increase in take-home pay. It's not filtering down to the middle-income individuals, from what I am hearing.”
Bassow encourages looking at the big picture, and how the new tax law affects you and your family.
“I don't see a significant increase in income due to this change,” he said. “In fact, I would suggest that they review their personal situation. Even though they might take home a little bit more, come the end of the year, their net reduction in income could decrease.”
For example, with the loss of personal exemptions, a family with six kids would lose $24,000 in personal exemptions.
“Look at your situation — everybody is different,” Bassow said. “There are so many different opportunities and issues related to this (that) it's kind of crazy. You've got to keep on top of it.”
The IRS is revising its tax withholding calculator to better help you make decisions on your W-4. It is expected to be available by the end of February at www.irs.gov.