YORK — Earlier this year Jay Charles’s twice-a-month
paycheck jumped by $65, a result of the new U.S. law
that cuts taxes almost $1.5 trillion over the next
decade. Then he did the math.
turns out Charles, a 48-year-old software developer in
Blythewood, South Carolina, may not get a tax cut at
all. He and his wife don’t have children and won’t
be able to benefit from an enhanced child tax credit —
and they’ll be losing some benefits including
unlimited state and local tax deductions. An online
calculator showed Charles he’ll break even, and his
wife, a professor who files separately, will probably
see a tax increase.
many Americans, the most noticeable effect of the tax
law so far is a jump in their take-home pay. After the
law passed, the Internal Revenue Service issued new
withholding tables, directing employers to adjust how
much tax money they take from workers’ paychecks
starting in February. Those withholding amounts are
effectively a guess at what employees’ tax liabilities
will be for 2018.
taxpayers are finding the tables are a blunt tool. When
2018 taxes are due in April 2019, millions of Americans
could find themselves owing the government far more than
was withheld. Millions of others could find they paid
too much in 2018, resulting in unusually large refunds.
Which category you fall in could come down to whether
you have any dependents and how old they are, if you
itemize deductions, and whether you’re a two-income
the meantime, the tax withholding amounts could have
political consequences. Control of Congress is at stake
in November’s elections, and the tax law is on track
to become a top issue. Voters’ opinions may depend on
whether they think they’re personally getting a fair
share of benefits from the law signed by President
Donald Trump in December.
is based on W-4 forms, typically filled out by workers
when they start a job and rarely adjusted afterward.
After the tax overhaul made parts of the old W-4
obsolete, the Treasury Department and the IRS issued a
new form on Feb. 28, and unveiled an online calculator
to help workers get their withholding right. Workers won’t
be required to submit new W-4s, however, and many are
unlikely to bother.
year it’s more critical than ever for all taxpayers to
assess their personal situation, to make sure they have
withholding at the right level," said Stephen
Dombroski, senior payroll tax compliance manager at
payroll company Paychex Inc.
taxpayers most likely to get a nasty surprise when
filing taxes next year are those who have typically
itemized on their returns and claimed large deductions.
That’s especially true if those deductions were for
state and local taxes, which are limited to $10,000 by
the law, or for unreimbursed employee expenses, which
are eliminated entirely. The IRS also urges couples with
two incomes, workers with multiple jobs, and taxpayers
with lots of dependents to re-check their W-4s.
bottom line: The more complicated your situation, the
more likely your withholding is out of whack, in
positive or negative ways.
for example, a double-income couple with two teenagers
living in California, one of the high-tax states where
SALT deduction limits could throw off withholding
calculations. They earn a combined $300,000 and deducted
$29,000 in SALT, $16,000 in mortgage interest, and
$7,000 in charitable contributions on their 2017 tax
this family gets hurt by the SALT limit, they benefit
from changes to the alternative minimum tax, or AMT.
Under the old withholding rules — under which the
family withheld a relatively high amount, claiming no
personal allowances — they’d still end up writing a
check of almost $4,000 to the IRS each year, because
they were hit by $6,500 in extra taxes from the AMT.
2018, the new withholding tables should boost this
family’s take-home pay by $8,426, according to
estimates by the Tax Institute at H&R Block — a
noticeable $702 more per month. They also no longer need
to worry about the AMT, which was sharply limited,
though not eliminated, by the new law.
final bill next April, however, could vary widely based
on a factor not reflected on their old W-4s and also
unrelated to the SALT and AMT changes — the age of
former W-4 counted all dependents equally, reflecting a
$4,050 personal exemption for every person on a tax
return, from toddlers to college-age kids and elderly
relatives. The tax revamp eliminated personal
exemptions, so the new W-4 must make distinctions
between children under the age of 17, who are eligible
for an increased $2,000 tax credit, and other dependents
who only get a $500 credit. For withholding purposes,
then, a child is worth four times the value of other
dependents. The law also made the child tax credit
available to more upper-income taxpayers.
the California family’s children are 15 and 16 years
old, H&R Block estimates, they’ll get to April and
find they owe the IRS $2,758, 30 percent less than last
year. However, if their kids are 17 and 18 —
ineligible for the child tax credit — they’ll need
to write a check for $5,773, almost 50 percent more than
last year. They’ll even need to pay the IRS a small
underpayment penalty of $15.
vast majority of U.S. workers will see some tax cut as a
result of the law, at least initially. Though the law’s
benefits for individuals fade over time, 65 percent of
American households can expect a tax cut in 2018 and 6.3
percent will see a tax hike, according to estimates from
the Tax Policy Center.
deride the law, which they’ve branded the "tax
scam," as a giveaway to the wealthy and
corporations that offers relatively small, temporary
benefits to middle-income taxpayers. In a January letter
to the IRS, top congressional Democrats raised concerns
that the IRS’s withholding tables might be
intentionally skewed to boost workers’ pay now and
leave them owing money in 2019, after the midterm
Secretary Steven Mnuchin said worries about political
motives were "ridiculous." In a letter
obtained by Bloomberg News to Senator Ron Wyden, an
Oregon Democrat, the IRS said it would "help
workers ensure they are not having too much or too
little withholding taken out of their pay."
no evidence that the IRS’s new withholding tables
boost paychecks overall by more than they should to
reflect the new law. The IRS acknowledges, however, that
for individual taxpayers, paychecks could end up being a
poor guide to how they’ll ultimately fare under the
encouraged taxpayers to use the withholding calculator
unveiled last week. "The majority of Americans don’t
need to do anything, but we always encourage people to
have the ability to check their specific
situation," he said.
many taxpayers in more complex situations, however, the
online calculator might not work. The IRS warns that
self-employed taxpayers, people with capital gains and
dividends, and others might need to wait for more
guidance, expected from the agency in "early
spring." In the meantime, they may need to pay a
tax adviser to determine their best withholding strategy
Charles realized his situation, he said he adjusted his
withholding to erase the boost to his paycheck. He’s
not a fan of the new law, which he worries is going to
spike the national debt. The windfall from the tax code
changes, he said, "is going to fall on a lot of
wealthy people and corporations, and none of it is going