BLS Insights

Tax Cuts and Jobs Act: Withholding and Form W-4 Changes

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Tax Reform Withholding Changes With the tax reform bill signed into law it is time to prepare for changes to the existing withholding tables and systems. Although the new tax bill has initially taken effect as of January 1, 2018, the IRS is still working on developing and issuing the withholding guidance. The changes are anticipated to be effective starting in February and employers and payroll service providers will be encouraged to implement the changes at that time.

Due to the upcoming changes to the withholding guidelines, Form W-4 will most likely be altered. The purpose of Form W-4 is for employers to determine the correct amount of federal income tax to withhold from each employee’s paycheck. Form W-4 is completed for every new employee and a new form should be completed when your personal or financial situation changes. This form requires every employee to determine how many personal allowances are to be claimed in order to calculate the federal withholding on each paycheck. The existing Form W-4 also considers itemized deductions in the calculation. Since the new tax bill has repealed several itemized deductions many people will now use the standard deduction. In addition, since personal exemptions have been removed from tax law, the previous Form W-4 will no longer be accurate in determining the correct amount of federal income tax to withhold from each employee’s pay.

So, what should employers do this January for existing and new employees? Right now the IRS emphasizes that the new withholding information will be designed to work with the existing Form W-4, meaning employees will not need to take further action at this time. As the IRS works this month on developing the new 2018 guidelines, taxpayers may start seeing the changes in their paychecks starting in February.

Each of the seven new tax brackets will need to be analyzed to get an idea of how much it changes our pay. In addition, since the tax bill eliminates personal exemptions and removes many itemized deductions, the government will most likely revisit Form W-4 and implement changes and update the instructions. Meanwhile, as the IRS is currently keeping the existing Form W-4, it will be important to keep track of your federal income tax withholdings to make sure you are still content with the amount being withheld. The likely delay between implementing new withholding tables and using the existing Form W-4 could result in inaccurate withholding amounts. When determining the amount of federal income tax to withhold, employees with no dependents will likely owe less tax under the new bill. Therefore, federal withholding based on the existing withholding guidelines will likely be too high for the time being and may result in higher income tax refunds in 2019. However, those that claim many dependents may now see higher taxes once the new withholding rates are in place. In addition, since many itemized deductions have been eliminated or altered, this may cause individuals to see higher taxes. For example, state and local tax deductions are now limited to $10,000 under the new law so those that had large state and local taxes may now owe more in taxes.

The main goal, regarding any tax law, is to have your income tax withheld  be as close to your actual tax liability as possible. Since the new tax withholding tables will be issued sometime this month, the changes to the federal withholding from employee’s paychecks will probably take place in February. As an employee or an employer, if you need guidance on how much federal income tax you should be withholding from each paycheck please give us a call for further assistance.

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About the Author

Private: Amy Gordon

Amy Gordon

Tax & Small Business Department

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