New Tax Law Raised Your Paycheck
Hello Money Nerve followers
I have had so many questions regarding the new tax law from my clients this year. People want to know how it will affect them and what action they should take. This in-depth article from MarketWatch gives you some advice for reviewing how the new tax law will impact your finances
About 90% of wage earners saw an increase in their paycheck this month now that the 2018 federal tax withholding tables are out.
The new tax law tables determine how much tax employers take out — or withhold — from an employee’s paycheck and the 2018 tables reflect the updated tax rates under the Tax Cuts and Jobs Act, as well as other changes that affect individuals, including a repealed personal exemption and increase in the standard deduction. Under the new law, there are still seven tax brackets, but six of them are lower.
Deciding How Much Money to Withhold
Workers choose how much money they want their employer to withhold from their paychecks on a Form W-4, usually claiming either 1 or 0 allowances. The higher the number of allowances, the less money is withheld, which means a larger paycheck. But when people choose fewer allowances (and have more money withheld), they’ll see the money with the new tax law when they file their returns the following year and get a refund.
The new tax law lowered federal tax brackets, hence the extra money in paychecks now. The changes are automatic, and if people want to adjust their withholdings, they will have to go to their employer and submit a new Form W-4 to do so.
Keep or Invest the Extra Money
This is the eternal question and the answer is, “it depends.” Some might find the extra cash will help them reach financial goals or pay off debts, but others say workers might want to adjust their withholdings so they don’t get a pay increase right away.
Why? The money might not be put to good use or, in certain cases, employees may end up having to pay more income tax next year, tax experts said. “If they’re afraid they’re going to spend it and not save it, then they should increase withholdings,” said Michael Berry, head of the advanced planning team for Voya Financial.
About 62% of taxpayers expect to receive a refund this year, according to a Credit Karma Tax survey, and half of those people already know what they’ll do with it. Only 11% intend to use the refund for a vacation or major event, and 6% said they’ll use it to buy themselves something. Another 20% said they plan to save it for a rainy day, 18% said they’ll use it to pay off credit card debt, 16% said it will go toward paying off other debts, 10% are saving for a major purchase, like a home or car, and others mentioned student loans, medical debts or helping family members.
The new tax law act keeps the seven income tax brackets but lowers tax rates. Employees will see changes reflected in their withholding in their February 2018 paychecks. These rates revert to the 2017 rates in 2026.
The Tax Act creates the following chart. The income levels will rise each year with inflation. But they will rise more slowly than in the past because the Act uses the chained consumer price index. Over time, that will move more people into higher tax brackets. This graph along with a detailed list of the tax changes is provided by The Balance.
|Income Tax Rate||Income Levels for Those Filing As:|
Trump’s tax plan doubles the standard deduction. A single filer’s deduction increases from $6,350 to $12,000, while the deduction for Married and Joint Filers increases from $12,700 to $24,000. It reverts back to the current level in 2026. It eliminates personal exemptions and most itemized deductions but keeps deductions for charitable contributions, retirement savings, and student loan interest.