Updated Jan. 12, 2018
In a previous post, I summarized the different ways the Tax Cuts and Jobs Act will affect employers. Now it’s time to delve into the employee side of things.
Effective Jan. 1, 2018, there will still be seven individual tax brackets for federal income tax; however, the amounts are lowered and the income ranges have changed. Here’s a breakdown, based on filing status:
The federal income tax amount that comes out of your paychecks (known as your withholding amount) is based on the IRS withholding tax tables (Publication 15), the withholding conditions that you state on your W-4 form, and your taxable wages (not your gross wages).
As of this writing, the IRS has not released the 2018 Publication 15. However, it has released Notice 1036, which shows the IRS withholding tax tables for the percentage calculation method. Your employer has until Feb. 15, 2018 to begin using the relevant percentage method to figure your withholding. Meanwhile, the 2017 rates apply.
Deduction for Personal Exemptions
For tax years 2018 through 2025, the new bill suspends the deduction for personal exemptions—which was $4,050 per person or dependent for 2017.
According to Bloomberg BNA, the personal exemption amount has been replaced with an allowance amount per employee, through 2025. However, the new tax law does not specify the allowance amount. Per Bloomberg BNA, “The Internal Revenue Service would have to decide whether the allowance amount would be equivalent to personal exemptions or a specific amount.”
Employees used to claim personal exemptions on their W-4 form. This means that the IRS will need to update Form W-4, and employees will likely need to complete a new W-4 at some point in 2018.
Also, the IRS online withholding calculator — which is designed to help employees fill out their W-4 so that they don’t overpay or underpay federal income tax — is currently being modified by the IRS to accommodate the new tax law. Once the updated calculator becomes available, consider using it to figure your withholding conditions for your 2018 W-4.
Your 2017 W-4 conditions will remain in effect until your employer implements your 2018 W-4 changes.
Individual taxpayers who will not be itemizing their deductions can still take the standard deduction, which has increased from:
— $6,350 to $12,000 for single filing status and married filing separately
— $12,700 to $24,000 for married filing jointly
— $9,350 to $18,000 for head of household
These increases will expire after 2025.
Supplemental wages are wages paid in addition to regular wages, such as bonuses and commissions. Federal income tax on supplemental wages are calculated according to the IRS withholding tax tables and your W-4 form, or at a flat percentage. Starting Jan. 1, 2018, the flat percentage decreases from 25 percent to 22 percent.
Child Tax Credit
The child tax credit has doubled under the new bill, jumping from $1,000 per child to $2,000 per child. The qualifying child must meet certain criteria for you to take the credit.
If you will not be taking the standard deduction and will be itemizing your deductions instead, you should know that:
— Deductions for state and local property, sales and income taxes are now limited to $10,000.
— Deductions for mortgage-interest payments are now restricted to payments on $750,000 of debt.
— Deductions for personal moving expenses and employer-provided moving expense reimbursements are now eliminated (except for members of the military).
For 2017 and 2018, taxpayers who itemize their deductions can write off eligible medical expenses that exceed 7.5 percent of their adjusted gross income (AGI). After that, the threshold will go back up to the current 10 percent. This deduction does not apply to employees who receive medical benefits through their employer’s pretax health plan. In this case, the benefit is tax-free, which would disqualify you from taking the deduction on your return since you already got a tax break when the premiums were withheld from your paychecks.
Also, the act repeals miscellaneous itemized deductions for employee expenses, through 2025. Miscellaneous itemized deductions include unreimbursed employee expenses, such as tools and supplies, professional organization dues, mileage and travel, union dues, and work uniforms.
Retirement Plan Loans
If you participated in a 401(k) or similar retirement plan and terminate from your job with an outstanding loan balance, you have 60 days to pay the balance. If you don’t, the loan will be subject to taxation and possibly a 10-percent penalty.
This tax can be avoided by essentially rolling over an amount equal to the balance into an individual retirement account (IRA) or a new employer’s qualified retirement plan within 60 days of your separation. The new bill extends this 60-day rollover deadline to until the latest date that you’re allowed to file your tax return for the year in which you defaulted on the loan.
Education Savings Plan
A 529 college savings plan enables you to withdraw money on a tax-free basis, provided the funds are used to pay for college expenses. The new bill broadens the use of 529 college savings plans to include K-12 private school tuition payments. Parents can now withdraw up to $10,000 tax free each year to pay for private elementary, high school or homeschooling expenses.
There’s more to the Tax Cuts and Jobs Act than mentioned above. If applicable, consult with a financial advisor, CPA, or tax professional for further information or guidance.