Double-check your paycheck with new tax law
Tax Day for 2017 is still a few months away, but you can make sure you're prepared to do your taxes for 2018 right now.
The Internal Revenue Service recently provided guidance regarding how the new tax law will be implemented for 2018. As many people begin to see increases in their paychecks, we asked accounting associate professor, Department Chair and tax attorney Gregory Clifton to share his insight on what taxpayers should consider both short-term and long-term regarding their tax obligations.
Who benefits from the new tax bill?
There are a variety of taxpayers who may benefit, but the analysis is situation specific. Since tax rates have decreased for each individual tax bracket and corporations, most taxpayers should see a decrease in their tax bill. The benefit could be larger for those who usually take the standard deduction versus itemizing because of the significant reductions and limitations placed on itemized deductions. State and local taxes are usually a large part of itemized deductions and so the new restriction on the deductibility of state/local taxes will probably offset some of the benefit related to the lower tax rate.
Why are these changes being made?
The new withholding tables are needed to reflect the changes in tax rates and tax brackets, increased standard deduction and repeal of personal exemptions that were included in the new tax reform law signed in December. The withholding guidance issued recently is for employers to make changes to their payroll systems and is designed to work with existing W-4s employees have on file.
How much can the average Coloradan expect his or her taxes to drop in 2019, assuming a median income of $50,000 for individuals and $75,000 for families? How much will they save between now and 2025, when most cuts for individuals expire?
For a single taxpayer who does not itemize, $50,000 of gross income results in a tax liability of $5,639 in 2017 and $4,179 in 2018 – a savings of $1,460. For a family of four that does not itemize (married filing jointly), $75,000 of gross income results in a tax liability of $5,979 in 2017 and $5,739 in 2018 – a savings of $240 before considering tax applicable tax credits. The child tax credit alone would increase that savings to $2,240, assuming both children qualify for the credit.
How soon will people see the changes in their paychecks?
Employees should begin to see withholding changes in their checks in February. The exact timing depends on when their employer can make the change and how often they are paid. It typically takes payroll providers and employers about a month to update withholding changes in their systems.
Will employees need to take action to get the new withholding rates?
No. Payroll changes required each year are made by employers and their payroll providers, so employees are not required to take any extra steps. However, employees should review their withholding to make sure it is accurate. The IRS will be releasing a new calculator and Form W-4 soon, to help employees ensure withholding is accurate.
What is a withholding table?
A withholding table shows payroll service providers and employers how much tax to withhold from employee paychecks, given each employee’s wages, marital status, and the number of withholding allowances they claim.
Should people check their withholding after the new 2018 Form W-4 and the withholding calculator are available?
Yes. It’s always a good idea for people to check their withholding status. The IRS encourages all taxpayers to check their withholding when the new information is available in February. The IRS will help educate taxpayers about the new withholding guidelines and the calculator. The effort will be designed to help workers ensure that they are not having too much or too little tax taken out of their pay.
Does the tax bill change how the average person or family should file taxes in 2019 (standard versus itemized deduction, couples filing together or separately)?
All taxpayers should continue the practice of itemizing deductions and determine filing status based on the applicable tax law and whether it lowers their tax bill.
Since many of the tax cuts for individuals are temporary, how can people prepare for possible tax hikes in the future? Is there a breakeven year, i.e., 2032, over which time the tax cuts will be neutralized for most individuals?
Preparing for possible future tax hikes has not changed under the new tax law. Taxpayers should consult their accountants or financial advisors for guidance on the proper savings vehicles.
How will changes to the child tax credit help families?
Since tax credits are a dollar-for-dollar reduction in tax liability, the increased credit will certainly help eligible families.
Are there any financial steps people should take in 2018 to save money on their 2019 taxes when the new tax code is implemented?
Since most taxpayers (71 percent according to CCH) do not itemize, the answer for the majority of taxpayers is most likely no.
What happens if I still need tax help?
Students in Accounting Affiliate Professor Robert Persichitte’s Volunteer Income Tax Assistance course are offering free tax preparation services to individuals earning less than $54,000 in 2017.
All appointments are available by walk-up every Monday and Thursday in MSU Denver’s Student Success Building, Room 236, from 5:30-8 p.m. to those who qualify until April 9. The typical tax filing can take anywhere from a half hour to an hour and 30 minutes depending on the complexity of the return.