For all the direct deposit and paycheck hounds out there who know their expected weekly or biweekly incomes like they know their own faces, this month might have brought a surprise: a plumper pay stub.
Lisa Greene-Lewis, a CPA and tax expert with Turbo Tax, says the difference will result in a 1% to 3% tax reduction as employers begin to use the updated IRS withholding tables. The IRS has advised employers to make the changes "not later than Feb. 15, 2018," so the small boost may be pending for some workers.
Here's what to keep in mind as your bank account metabolizes the difference.
Review Your W-4
Employers use W-4 forms to determine federal tax withholdings. Workers would be wise to revisit those forms or use the IRS tax withholding calculator (which will be available by the end of February) to calculate their correct withholding amount. The Turbo TaxCaster app also generates a side-by-side 2017/2018 comparison to get an idea of what you're in for.
"One of the changes taking place on that W-4 form is the elimination of personal exemptions and dependent exemptions. You get a personal exemption for yourself of $4,050. You also get one if you’re married for your spouse, and then for your kids you get that," Greene-Lewis explains. "You’ll still get [that exemption] in 2017 but it's being eliminated in 2018."
Pay the IRS too much and you'll take home less money throughout the year, and essentially give the agency an interest-free loan. But pay them too little and you could be hit with a surprising bill next year. The latter may be a bigger risk for many workers due to the decrease in paycheck withholdings.
Itemized deductions can include taxes and insurance paid on homes, charitable donations, and even large, uninsured medical and dental expenses. (These can't be claimed in conjunction with the standard deduction.)
Under the new law, people who itemize deductions will face caps on how much of those expenses they can withhold. There is now a $10,000 cap on property taxes, state and local income taxes, and state withholding, Greene-Lewis says. "Before, you could deduct all of those [costs] no matter how much they were. Now you get a cap at $10,000 for state and local income tax, state income tax withholding, and property tax."
Finally, people with very expensive mortgages should be aware of their new tax burden. Previously, homeowners with mortgages up to $1 million could deduct the interest they pay. That threshold has fallen to $750,000 for homes purchased after December 15, 2017.
Under the new law, the child tax credit was doubled from $1,000 to $2,000, a boon for parents claiming their children as dependents.
Credits are a one-to-one reduction of the taxes you owe. So, if an individual owes $5,000 in taxes, their tax burden would reduced to $3,000. (By contrast, Greene-Lewis explains, a deduction reduces your taxable income — but you are still taxed based on that income.)