We’ve been talking about the tax bill for a while now, but despite all the politically commentary attached to it, the bottom line seems to be a bit fuzzy still. If you’re still trying to understand if you need to make changes to keep from getting hit with a large tax bill in 2019, here is some information to help you make sense of it all.
LEAVE YOUR PAYCHECK ALONE
This January the IRS released guidance for payroll departments to adjust the withholding for their employees in accordance with the changes made in the tax reform bill. If you are collecting a regular paycheck, there is no need to adjust your withholding, as companies are required to implement these changes by February 15, 2018. You may not have seen the change in your paycheck just yet, but that doesn’t mean the changes aren’t coming, so keep your eyes peeled.
TAX RATES ARE LOWER
In general tax rates have been lowered, but the brackets have been changed as well so the rates may not directly translate to savings. These lower rates have been reflected in the withholding changes for employers discussed above, but if you have income that is not subject to regular withholding and needs to be estimated quarterly this is something to take into consideration. Here is a chart you can use to compare the old tax rates and brackets to the new ones for 2018. However, if you are unsure of what your estimated payments should be reach out to a tax preparer who should easily be able to help you prepare those forms.
STANDARD DEDUCTIONS ARE HIGHER, BUT PERSONAL EXEMPTIONS ARE SUSPENDED
Another touted change included in tax reform bill is an increase in the standard deduction. It was increased from $12,700 to $24,000 for married couples filing jointly, and $6,350 to $12,000 for single individuals. However, what has been less discussed, is the suspension of the personal exemption. For most taxpayers in 2017 that exemption would be worth $4,050 per household member on your tax return. For instance, a married couple with one child could claim $12,150 as their exemption amount (three personal exemptions). Therefore, though the standard deduction may have been raised, the suspension of the personal exemptions may more than offset those savings especially for larger families. Once again, this all will be adjusted by your payroll department, so if you’re collecting a regular paycheck, there is nothing additional you need to do. It’s just important in understanding why your take home pay may actually go down even if your tax rate and standard deduction have gone up.
Look for changes in your paycheck in the next month or so (if you haven’t seen them already), and if you don’t understand the changes, make sure you ask questions. Compare your paystubs from last year to your new paystubs to check the the withholding amounts and verify if those are the only changes that matter. If you’re still struggling with these concepts, bring these paystubs with you to speak with a licensed Certified Public Accountant (CPA) of Enrolled Agent (EA) that can help you make sense of it on a personal level.
Written By: Lindsay Dell Cook
Lindsay Dell Cook is a CPA and founder of Budget Babble. She lives in Philadelphia with her uber supportive husband and adorable daughter. When she's not working, she enjoys spending time with her family, taking their lovable mutt for walks, or reading a good book while buried under a pile of cats.