On December 22, 2017, a new federal tax bill widely considered the most significant tax legislation to occur in about 30 years was signed into law. And though the bill won’t have any effect on your 2017 earnings and statements, it certainly will moving forward.
The good news is that for the vast majority of Americans, their take home pay will increase as a result of the legislation when it takes effect in February. In fact, the U.S. Treasury says that about 90 percent of Americans can expect a bump in their paycheck. However, this should also serve as a good time for American workers to revisit their W-4 withholdings to make sure that they’re not paying too few (or too many) taxes.
Paying too few, of course, would translate to a smaller tax refund – or perhaps even owing money to the IRS – when it comes time to file 2018 taxes in early 2019. Here’s a closer look at some things to watch out for when the tax law becomes effective next month:
Tax Withholdings Explained
The IRS will even admit that tax withholdings are a bit of a guessing game. The goal of any American worker, however, should be to hit that withholdings sweet spot – where you can assure you get the most money in your check without having to pay the IRS come tax filing time.
To do this, the IRS has created tables based on the allowances that are claimed. Generally speaking, the fewer allowances that are claimed on the W-4, the more taxes that will be withheld – and vice versa. So if you claim “0” for instance, the maximum amount of taxes will be taken from your check than if you were to claim “2.”
It’s worth noting that the IRS has created new tables in the aftermath of the tax bill, but it says that a new W-4 form is necessary as well – and it likely won’t be available in 2018. This could potentially complicate things even more in what’s already a guessing game.
Who’s at Risk?
According to tax experts, the people most at risk for owing the IRS more come time to file 2018 taxes are those that claim several allowances. This is because the new tax law eliminates some of the itemized deductions that many Americans may have used to offset the lesser amount of taxes being taken from their paychecks.
Here are some other ways you can guesstimate whether you’ll need to address your withholdings:
How Do I Change My W-4 Withholding?
The nice thing about changing your W-4 withholding is that it can be done at any time of the year. There’s no enrollment window you have to abide by to make changes to it – just contact your company’s human resources department and request to make a change. Here’s an overview of withholding basics:
Claiming 0: The maximum amount of taxes are taken from your check.
Claiming 1: Ideal for single Americans with just one job.
Claiming 2: Ideal for those who are married or those who are single but have more than one job.
Claiming 3: Ideal for those who are married and have at least one child.
Claiming 4: Ideal for those who are married and have at least two children.
As mentioned above, the good news with the new tax law is that you’re very likely to receive more money in your paycheck come February, regardless of what you claim. But, it’s always a good idea when such changes come into play to reassess your withholdings to ensure you don’t get burned down the road.
Regards,
Ethan Warrick
Editor
Wealth Authority
