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How will you be affected by the new 2018 Tax Cuts and Jobs Act?

Posted on February 7, 2018

The new Tax Cuts and Jobs Act was enacted in December 2017, with an effective date of January 1, 2018.

So what does that mean for you and your taxes? Here’s what Teipen Selanders Poynter & Ayres CPAs say about changes you will feel right away and other changes you’ll experience when you prepare your 2018 tax return.

New 2018 Tax withholding tables

It took a few weeks, but the IRS released new withholding tax tables for 2018 with explicit instructions that they should be implemented by employers no later than February 15, 2018.

These new tables include newly reduced tax rates for 2018, which will result in increased take-home pay for about 90% of wage earner paychecks. 

You will feel that increase right away. However, Teipen CPAs caution, the new tax law also imposed new restrictions and adjustments to earnings, which may have you feeling pinched as you prepare your 2018 tax return:

  • eliminating tax deductions for exemptions and allowances
  • restricting certain itemized deductions
  • increasing the standard deduction for non-itemizers, and
  • increasing tax savings from the child tax credit for taxpayers with children below age 17.

New lower federal income tax on bonuses and commissions

In good news for employees that expect quarterly or yearly bonuses and commissions, the supplemental tax rate for 2018 has been reduced to 22% from last year’s rate of 25%. That said, our CPAs recommend that you consider requesting that your employer still use the 25% rate if you have other taxable income sources.

Form W-4

The IRS is working on revising W-4 Forms to be consistent with the new law, but in the meantime, employers should use the new tax tables in conjunction with existing 2017 employee W-4 Forms.

The problem with the existing forms is that the new tax law eliminated deductions for personal and dependency exemptions, therefore the old form’s number of exemptions and allowances are no longer relevant for 2018 taxes.

The new online withholding calculator

The IRS is encouraging taxpayers to review their year-to-date 2018 federal tax withholdings by entering their tax information into the IRS online calculator — which is expected to be on updated on the IRS website by the end of February.

To avoid unexpected taxes next April (2019), based on under- withholding of federal income tax this year, Teipen CPAs recommend that employees do the following:

  • Check their withholdings on the IRS.gov website calculator once (expected to be posted by late February)
  • Complete a new 2018 W-4 as soon as it is revised by the IRS
  • Determine the ratio of year 2018 federal income tax withholdings to taxable wages from your 2018 check stub.

It can be complicated to compare the ratio of tax to net wages (gross pay, less pre-tax deductions such as retirement plan and health insurance employee deductions) to the effective tax rate on your 2016 and 2017 Form 1040s. If you are uncertain how to do this, your Teipen CPA will be happy to walk you through it.

Teipen Selanders Poynter & Ayres caution that it is
 more important this year than ever before that taxpayers review their 2018 federal income tax withholdings to avoid possible tax under-payments. This will be especially true for:

  • those who itemize deductions
  • those with large real estate tax and state and local income tax deductions, which have been reduced in 2018
  • two wage earning couples
  • taxpayers with dependent children, and
  • those with business or rental income.

So, whether you are an employer or an employee, if you (or your employees) have any tough questions about the new 2018 federal income tax withholding rates and their effect on you for 2018, our CPA team is standing by to answer your questions. We want to be sure you are in the know, with no tax or withholding surprises at the end of the year.