The new federal tax plan is now in effect — and it’s going to mean more spending money for most people, at least in the short term.
Most workers across the country will have less tax money withheld from their pay, now that the Internal Revenue Service has released new withholding tables and instructed employers to make adjustments.
How much will paychecks change?
The exact amount will vary depending on an individual’s earnings, frequency of pay, and whether deductions are claimed. Treasury Secretary Steven T. Mnuchin said 90 percent of workers will see an increase in their paychecks. The Tax Policy Center, meanwhile, said 80 percent of taxpayers will receive an overall tax cut in the 2018 tax year.
A single person who earns $50,000 a year, has no children, claims no deductions, and is paid biweekly could receive as much as $61 more per paycheck under the new tax structure.
A married couple with two children under 17 and a household income of $75,000 would receive an overall tax break of $2,119 in 2018, according to a Tax Policy Center analysis. A married couple with two children and income of $30,000, meanwhile, would receive a tax break of $817 — or roughly the same percentage.
When will these changes appear in paychecks?
The IRS guidelines, published last month, instructed employers to implement changes by Feb. 15.
For payroll departments, making changes quickly — during weeks when they are also sending out W-2 forms to employees for their 2017 taxes — is a challenge, said Alice Jacobsohn, senior manager of government relations for the American Payroll Association.
Companies that use software services or vendors for payrolls will need to ensure those third parties make adjustments, and then test the changes themselves, Jacobsohn said.
“You can’t just enter the numbers in and say ‘done,’ ” she said. “They hopefully will be able to meet that Feb. 15 deadline or be pretty close to it. But as you trickle down to smaller employers, it may be more difficult for them.”
Will everyone get a tax break?
Even if take-home pay goes up, not everyone will get a tax cut. Lawmakers in high-tax states have said they are concerned about constituents who relied on large deductions of state and local income taxes, because that deduction is now capped at $10,000. New Jersey, with its highest-in-the-nation property taxes, is scrambling to soften that blow, through potential changes to the state tax system and a plan to join other states in suing the federal government.
Tax cuts also vary based on how much people earn. “In general, higher-income households receive larger average tax cuts as a percentage of after-tax income, with the largest cuts as a share of income going to taxpayers in the 95th to 99th percentiles of the income distribution,” a Tax Policy Center analysis found.
Will taxpayers still get refund checks after filing taxes?
In the process of changing withholding tables, IRS officials said they aimed to limit over- and under-withholding. That means tax refunds will likely shrink for many taxpayers, said David L. Zalles, a Blue Bell tax accountant.
The average refund for individuals was $2,795 in fiscal year 2016, according to IRS data.
If someone had grown accustomed to large refund checks to pay off debt or fund a vacation, Zalles said, this year’s changes may lead to an unpleasant surprise next year.
“They may be happy with [increased take-home pay], and won’t be unhappy until they find out that they are not going to get their big refund next year,” Zalles said.
Will these changes impact the economy?
Pennsylvania’s Independent Fiscal Office predicts that extra money for residents will mean a boost for the state economy.
With more cash in their pockets, consumers are likely to spend more. That spending, in turn, raises more sales tax for the state, said Matthew Knittel, director of the Independent Fiscal Office in Harrisburg. Companies have also received tax cuts, leading to increases in dividends and capital gains, he said.
“We are expecting a short-term boost of economic growth in the next year or two,” Knittel said. “Long term, it’s less clear whether it will boost economic growth, and one of the concerns is that the higher federal debt will drive up interest rates.”
Disposable income in Pennsylvania could increase by at least $7 billion in the fiscal year that begins in July, Knittel’s office said, citing other reports. Sales tax revenue could increase by between $10 million and $20 million in the current fiscal year, according to the Independent Fiscal Office, and by between $60 million and $80 million in fiscal year 2018-2019.
Are more changes coming?
The payroll changes going into effect this month may not be the last change of the year. IRS officials said they are revising the W-4 form, which employees fill out to claim deductions and give employers guidance on how much to withhold from their pay.
Jacobsohn, of the American Payroll Association, said a big change to the form could require new computer software for employees. That could take months to implement, she said.
“[If] you filled out a W-4 20 years ago and maybe you didn’t change it because your situation hasn’t changed … explaining to that employee to get them to understand that they have to fill out a W-4 and what they need to do, that kind of outreach takes time as well,” she said. “It’s really just a timing issue of getting it all done within the deadlines.”