By Gary Wallace, CPA, Tax Partner
One of the most notable individual income tax changes associated with the Tax Cuts and Jobs Act that you should be aware of are the adjustments to federal withholdings. For individual taxpayers, many will see the results of the individual tax changes initially through adjustments to withholdings. The IRS issued the 2018 updated withholding tables on January 11 and instructed employers that the withholding changes must be in place no later than February 15,2018.
For an employee, the changes will obviously be dependent on your wages and exemptions. For example:
- A SINGLE taxpayer (paid monthly, one allowance) with $75,000 annual salary will likely see a $2,188 decrease in their 2018 federal withholding
- 2018: $10,713
- 2017: $ 12,901
- A MARRIED taxpayer (paid monthly, with two allowances) and with $75,000 annual salary would see a $1,568 decrease in their 2018 federal withholding
- 2018: $6,237
- 2017: $7,805
Other Individual Tax Planning Considerations
The big take away for these changes is that not only did tax rates and withholdings change, the Tax Cuts and Jobs Act made other significant changes that also need to be considered, mostly around the law changes in the areas of deductible interest and state and local taxes. Since the standard deductions were increased, some taxpayers may no longer need to itemize deductions.
If taxpayers are no longer utilizing itemized deductions, their tax positions may be more straightforward and it is important to point out that the withholding tables do not always equal the tax liability. For example:
- A NON-ITEMIZER SINGLE taxpayer with $75,000 annual salary would see their federal tax liability decrease in 2018 by $2,095
- 2018: $9,800
- 2017: $11,895
- A NON-ITEMIZER MARRIED FILING JOINTLY taxpayer with $75,000 annual salary would see their federal tax liability decrease in 2018 by $1,462
- 2018: $5,739
- 2017: $7,201
Employees have historically adjusted withholdings by providing their employer with an IRS Form w-4 and indicating the number of exemptions (allowances) which tracked to specified withholdings. With the repeal of “exemptions” in the Tax Act, the IRS will need to update this system but has not done so at this time.
The big caution on tax withholdings is that these tables do not take into account other items that may impact your tax situation. Investment earnings have an impact. The itemized deduction limitations are not factored into the tables. Congress enhanced certain tax credits which may be a tax reduction. Bonuses may be taxed at a flat rate. The list goes on and on. Bottom line is there are a lot of variables that can impact one’s tax liability. The tax withholdings may need to be adjusted or modified to take these into consideration.
The IRS indicates that it will provide further guidance and a withholding calculator but it has not been released yet. In the meantime, it is best to speak with a professional. We are working with our clients to help them understand these changes and the impacts on their personal taxes to avoid surprises when the 2018 tax returns are filed in early 2019. Although there are many general themes, it comes down to the specifics and you may want to deal with those now to avoid an unexpected result.
As mentioned previously, each taxpayer’s situation is unique and you should speak with your tax advisor before making any decisions. If you have any questions, please contact your Keiter representative or Email | Phone: 804.747.0000. We are here to help.
Read more on this topic in the Richmond Times Dispatch article
“Bigger paychecks coming to workers thanks to tax overhaul, but experts warn you could owe the IRS next year”
We will continue to share our insights on the finalized tax changes for businesses and individuals in the coming months. Sign up for our newsletter to stay informed on tax and other accounting topics.
Additional Individual Tax Planning Resources
- New Tax Law: What You Need to Know
- Business Expense Changes: Reduced Meals and Entertainment Deductions
- Tax Cuts and Jobs Act: What you need to know about the Estate, Gift & Trust Provisions
- AMT Changes to Individuals and Businesses
- Tax Cuts and Jobs Act Resource Guide
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.