The 2018 Withholding Tables Are Out and I Don't Know How They Will Affect My Taxes!
Jan 22, 2018
If you work for an employer that uses a payroll service like ADP, Paychex or Larry's Income Tax (yes, we do payroll), you'll probably notice a change in your paycheck this week due to the new 2018 withholding formulas. If your employer calculates their own payroll...the changes will be a little slower to arrive.
Regardless of how fast your paycheck is impacted, there are enough articles hinting at the idea that you may be in for a surprise when you file your return next year, and we'd like to try to clear up any confusion or anxiety you may have regarding the topic.
Let's start off by stating the fact that everyone's tax situation is different. You and your neighbors, each working at the same place, earning the same money, with 2 kids, a cat and two dogs could each see a vastly different final tax bill come tax season!
Having said that, we will agree that those articles may be correct for some folks--with the most vulnerable being single folks who used to have a significant amount of itemized deductions--especially miscellaneous deductions subject to the 2% floor (like unreimbursed employee expenses).
If you're married with kids, you may also be vulnerable to a surprise. For example, if you have more than three kids and/or had enough unreimbursed employee expenses, mortgage interest, etc to itemize in the past, you may find that your taxable income will most likely increase this year.
However, with the tax brackets being more generous, there's a chance that the tax bite may not be gruesomely crippling (or even bad at all) to your wallet--claiming kids under 17 years will definitely help!
The truth is that many factors affect the total tax you owe--but the amount that gets withheld from your paychecks is not one of those factors. Taxes withheld are simply "prepayments" toward your tax bill, and therefore, the more you withhold throughout the year, the lower the final balance will be.
So for example, a MFJ return with gross income of $68K starts off with a tax bill of about $5,300. Whether you choose to withhold $60 or $6,000 from your paychecks, that $5,300 doesn't change. Though the $5,300 tax itself won't change, if that couple has two kids <17 yrs old, they'd now get to subtract $4,000 ($2K/child) from that $5,300 and now only owe Uncle Sam a balance of $1300--without taking the total tax withheld throughout the year into consideration.
Many other factors may change that $5,300 tax bill! For example, paying student loan interest, teachers who pay for classroom supplies, making Traditional IRA contributions, having high enough itemized deductions, pulling early retirement, etc. all will affect the amount of taxable income, which in turn will change the original $5300 we calculated (not all in a favorable way).
Only after you've arrived at that final amount of tax owed will you then subtract the amounts you withheld during the year to arrive at your final balance owed. If you're lucky, maybe all those credits and deductions will cover the entire tax bill and the entire amount of withholding would be refunded to you!
"Thanks for the lesson, but what do I do right now?", you ask. If you fall into one of those "vulnerable" scenarios we mentioned above, and your new withholding ends up being lower than "the usual", save yourself the stress and ask your employer to withhold extra from each paycheck--at least to match the same amounts as before the change took effect.
At worst, you'll owe that much less tax. At best, your refund will be that much more. Once you go through the entire 2018 and see how "all the chips fell", you can then fine tune your withholdings a little bit better in all future years (until 2025 when most of the changes are due to expire!).