Enjoy that bigger paycheck in 2018, courtesy of the tax overhaul. You may end up owing Uncle Sam more money in 2019.
The Tax Cuts and Jobs Act went into effect at the beginning of the year, touting a reduction in federal income rates across the board.
The change brings good news for workers.
"You will start seeing more money in your paycheck — a 1 percent to 3 percent reduction in tax rates overall under the new law," said Lisa Greene-Lewis, a certified public accountant at TurboTax.
Now for the bad news: The IRS hasn't yet released its new withholding tables — which, along with your Form W-4, are instrumental in determining how much in federal income taxes are taken from your paycheck.
(The tables were released on Jan. 11 after this article was originally posted. Learn more about them here.)
Tax experts expect this information to emerge in the next few weeks.
"By the end of January or early February, you should look at your W-4 to make sure your employer has the information you need to withhold appropriately for 2018," said Melissa Labant, director of tax policy and advocacy at the American Institute of Certified Public Accountants.
If too few taxes are withheld from your pay in 2018, you could owe the IRS in 2019.
Too low withholding
Sen. Ron Wyden, D-Ore., and Rep. Richard Neal, D-Mass., submitted a Jan. 8 letter to David Kautter, acting commissioner of the IRS, citing these concerns and more: They worry that the IRS may release tables that deliberately withhold too little from your pay.
"The Office of Tax Policy at the Department of Treasury may push IRS to incorporate withholding formulas that take insufficient taxes out of workers' paychecks," the congressmen wrote.
"This will foster the appearance of a larger tax cut in 2018 that then disappears during the 2019 filing season," they wrote.
An email to a spokeswoman for Rep. Kevin Brady, R-Texas, chairman of the House Ways and Means Committee, was not immediately returned.
Review your W-4
Politics aside, reviewing your W-4 is a good practice in any tax year. If not enough is withheld, you'll owe money come tax time. Pay too much, and you end up with a large refund.
"You may have different circumstances now compared to when you started working at your employer," said Labant.
Major life changes, including having a child or getting married, may warrant an update to your withholding.
For instance: In the past, it may have made sense for people who itemize deductions to claim more allowances on their W-4 and have less tax withheld.
This may no longer be the case now that the standard deduction has nearly doubled to $12,000 for singles and $24,000 for married couples who file jointly.
About 49 million taxpayers – 28 percent of filers, itemize, according to the Urban-Brookings Tax Policy Center.
"Now that they've doubled the standard deduction, there may be people who are no longer eligible to itemize," said Greene-Lewis. "Be aware that you might not get as many allowances on your W-4."
Also, the Tax Cuts and Jobs Act does away with personal and dependent exemptions, and broadens the applicability of the child tax credit to include higher-income households.
"Given the changes in the tax code, it's a good time to look at your W-4," said Labant. "You don't want any surprises, especially when that surprise is a large balance due come tax time."
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