January 19, 2018
By Todd Schanel
The Tax Cuts and Jobs Act of 2017 brought sweeping changes to individual income tax. And with those changes, you might see changes to your take-home pay. We’ll take a look at those changes, and how they might show up in your paycheck.
First, let’s take an overview of the changes. More details can be found in our earlier post here.
The new tax law kept seven tax brackets but changed the rates and the income cutoffs for each bracket. The top rate dropped from 39.6% to 37%, and it kicks in at a higher level. Previously, for a couple filing Married Filing Joint, the top rate started at $470,700. Under the new law, the highest rate starts at $600,000.
Major changes come in the area of personal exemptions and the standard deduction. Personal exemptions are suspended, but the standard deduction has nearly doubled to $24,000 for couples filing Married Filing Joint, $18,000 for Head of Household, and $12,000 for single filers.
Families lose their tax break for multiple children, but this is mitigated by an increase in the Child Tax Credit, from $1,000 under the old law to $2,000 with the new law. Up to $1,400 of this credit is refundable. Phaseout limits have increased to $200,000, so more families will be eligible.
Over on Schedule A, the deduction for state and local taxes is now capped at $10,000, and for loans originating after 2017, mortgage interest is only deductible on acquisition debt up to $750,000. Older loans are grandfathered in and are subject to the old cap of $1 million. Home equity loan interest is no longer deductible.
The IRS released new withholding tables on January 11, 2018, which are to be used as soon as employers and payroll companies can. The IRS hasn’t drafted a new form W4 for the changes in the tax law, so the new withholding tables are designed to be used with the W4 forms out there now.
Comparing the 2017 and 2018 withholding tables reveal a few general changes. Except for the lowest 10% bracket and the 35% bracket, all the rates have dropped, and the cutoff points for each bracket have moved up. Overall, most wage earners should see a bump up in their take-home pay.
So let’s take a look at two scenarios and see how they compare under the new tax law.
Jeremy is single with no children and earns $65,000 and is paid every two weeks. Using the 2017 withholding tables and calculations, he would have $400.10 in Federal income tax withheld from his paychecks.
Running the same calculations with the new 2018 withholding tables, his Federal withholding drops to $327.41, an increase of $72.69 every two weeks, or $1,890 over the course of a year.
To keep the numbers simple, we’ll assume Jeremy has no other income and will not be itemizing his deductions. Using the 2017 standard deduction, personal exemption and tax rates, Jeremy’s Federal tax liability will be $9,383.
Under the new law, his Federal tax liability drops to $7,600. a tax savings of $1,783.
Rebecca and Walter are married with three children. To keep the calculation simple, we’ll assume that Rebecca is the breadwinner, and earns a salary of $165,000. Using the 2017 withholding tables, Rebecca would have a total of $1,019.74 withheld every two weeks. With the 2018 tables, the amount drops to $845.67, for an increase in take-home pay of $174.07, or $4,526 for a year.
Again, we’ll assume Rebecca and Walter have no other income and are not itemizing their deductions. Using those numbers and the 2017 standard deduction, personal exemptions, and tax rate, their total tax would be $25,503.
But with the new law, their tax will be $22,899. However, since they are now eligible for the child tax credit under the new law, they receive a credit of $2,000 for each of their three children which drops their Federal tax liability by $6,000 to $16,899. Overall, the new tax law will save them $8,604 in Federal income tax.
These two simple examples demonstrate that the new withholding tables will put more money in the pockets of employees. While it’s not necessary to update your W4 until the new ones come out. it’s not a bad idea to check with your CPA to see if your withholding needs to be adjusted.
Do you have questions about the new tax law and how it will impact you? Do you need to make adjustments to your withholding? Email or call our office at 561-277-3195 and we’ll guide you through the changes!