Most Americans are aware that Congress recently passed a major tax cut, but most are not familiar with the details on how it will affect them personally. In a nutshell, the so called 'standard deduction' has been almost doubled. This means that the standard deduction will be $24,000 for married taxpayers and $12,000 for single taxpayers. As a result of these changes, many (but not all) Americans will have an overall lower tax bill. To adjust for this tax cut, the IRS is sending out new tax tables to employers and requiring that they be implemented by no later than February 15th. Approximately 75 percent of Americans take the standard deduction (and this will increase in light of the increase in the deduction going forward).
Using the information that you have previously provided your employer's payroll office, your new payroll will be calculated and result in a net increase of the take home amount. A typical taxpayer can expect a 3 to 4 percent increase in take home pay. While a bigger take home paycheck sounds like good news, this is all based on estimates using a 'one size fits all approach' that may leave many taxpayers owing money to the IRS next year.
Why many people should review their W-4 withholding and likely get professional advice
The W-4 form is possibly one of the most confusing documents that an employee will have to deal with when starting a new job. With very little guidance provided, you are asked to select a number of allowances, and on that basis the amount of money withheld from your paycheck for taxes will be determined. Many people mistakenly believe that the word allowance is synonymous with 'dependents' and they answer accordingly. Allowances are simply a way of determining how much of your pay is withheld using some very oversimplified guidelines. The most obvious guideline for your withholding should be your most recent tax return (assuming your financial picture has not changed).
The ideal situation is to have just the right amount of taxes withheld so that you don't end up owing the IRS and that you don't get a large refund. Perhaps for those that have problems with saving money a big refund is a forced savings plan, but in reality it is an interest free loan you are giving the IRS for the year.
James L. Paris
In order to understand how the doubling of the standard deduction will affect you, you first have to understand what the standard deduction is. It is made available as an alternative to taking itemized deductions. It is the government's way of giving you a flat amount to take right off the top of your income rather than requiring you to gather together all of those receipts and 'itemize.' While the increased standard deduction will make things easier, many people will lose a lot of deductions under the new law. This is why it may be possible that on a case by case basis some people should not automatically have their withholding reduced on February 15th.
ChrstianMoney.com's overall assessment of the new tax law is favorable. We believe, as planned, most middle class taxpayers will see an overall reduction in income taxes. We recommend, however, that taxpayers with historically significant itemized deductions have a tax professional review their 2018 witholding. What probably makes sense for most people is to wait until receiving their first paycheck with the increase and take that paycheck stub to be reviewed (along with your most recent tax return) to be sure you are on track to have enough taxes withheld.
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