In the wake of passage of the Tax Cuts and Jobs Act (TCJA) late last year, the IRS has taken one of the first critical steps to institute the law’s overhaul of the federal income tax regime. The IRS has released updated withholding tables that indicate how much employers should hold back from their employees’ paychecks to satisfy workers’ tax obligations. The new tables may provide the correct amount of tax withholding for individuals with simple tax situations, but they’ll likely cause other taxpayers to not have enough withheld to pay their ultimate tax liabilities under the TCJA.

New withholding tables

The revised IRS withholding tables reflect the TCJA’s increase in the standard deduction, suspension of personal exemptions and changes in tax rates and brackets.

The law roughly doubles the 2017 standard deduction amounts to $12,000 for single filers and $24,000 for joint filers. It also temporarily eliminates personal exemptions, which taxpayers previously could claim for themselves, their spouses and any dependents. (The personal exemption amount for each such individual was $4,050 in 2017.) And the TCJA adjusts the taxable income thresholds and tax rates for seven income tax brackets.

Employers and payroll services use the withholding tables to determine the amount to withhold from employees’ paychecks in light of their wages, marital status and number of withholding allowances. Employees provide this information on their Forms W-4.

The new withholding tables are designed to work with the Forms W-4 that employers already have on file for their employees. In other words, employees don’t need to complete any new forms or take any other action at this time.

Employers, on the other hand, must move to incorporate the new tables into their payroll systems as soon as possible — and no later than February 15, 2018. They should continue to use the 2017 withholding tables until they adopt the new figures.

A big caveat

The IRS expects that many employees will see increases in their paychecks after the new tables are instituted in February, but it’s possible that some taxpayers could find themselves unexpectedly slammed with bigger income tax bills when it comes time to file their 2018 tax returns. That’s because, in addition to cutting tax rates, the TCJA eliminates or restricts many of the popular tax deductions those taxpayers have claimed on their returns in past years.

For example, beginning in 2018, taxpayers who itemize can claim a deduction of no more than $10,000 for the aggregate of state and local property taxes and income or sales taxes. These taxpayers also can deduct mortgage interest on debt of only $750,000 ($1 million for mortgage debt incurred before December 15, 2017) and can’t deduct any interest on home equity debt, even if the debt existed before the TCJA was enacted. The higher standard deduction and expansion of family tax credits may offset the loss of these and other deductions — as well as personal exemptions — but taxpayers won’t know for certain until they actually prepare their 2018 returns in 2019.

The IRS itself cautions that people with “more complicated tax situations” face the possibility of having their income taxes underwithheld. If you itemize your deductions, are married and you and your spouse have multiple jobs or if you have more than one job per year, you should review your tax situation and adjust your withholding allowances as appropriate. Note that it’ll be up to taxpayers to alert their employers of the need to make adjustments to avoid the under- or overwithholding of taxes from their paychecks.

The IRS is updating its withholding calculator (available at irs.gov) to assist taxpayers in reviewing their situations and expects the new calculator to be available by the end of February. The calculator will reflect changes in available itemized deductions, the increased child tax credit, the new dependent credit and repeal of dependent exemptions.

Beyond income taxes

Of course, paychecks also are subject to withholding for non-income taxes. Specifically, wages are subject to withholding for Social Security and Medicare taxes (known as FICA taxes), too.

For 2018, the employee’s share of the Social Security tax is 6.2% of the first $128,400 of taxable earnings. The employee share of the Medicare tax is 1.45% of all taxable earnings. Taxpayers with taxable earnings of more than $200,000 for individuals or $250,000 for couples also are subject to a Medicare surtax of 0.9%.

Better safe than sorry

If you’re subject to withholding, you’d be wise to check your situation by consulting with your tax advisor or by using the revised IRS withholding calculator once it becomes available. However, those who rely solely on the new withholding tables run the risk of dramatically under- or overwithholding on their taxes. At best, that means they extend the federal government no-interest loans of their hard-earned income; at worst, they could end up on the hook for far greater taxes — plus penalties — when they file their 2018 tax returns. We can help you plan now for all of the changes in the new tax law.