Following the passage of the GOP’s tax reform bill, individuals could see a slight bump in the take-home pay they see in their paychecks.
That increase, however, isn’t likely to occur until some weeks beyond the start of the new year.
As Republicans have long promised, the tax overhaul alters seven tax brackets and reduces the income tax withholding rate. As a result, employers will deduct less money from worker’s paychecks.
The average savings for individuals come in at around $2,000 per year, though the amount varies widely depending on the tax bracket under which an individual falls and the W-4 information they provide, said Paul M. Fruci, CPA of Fruci and Associates in Spokane.
The nonpartison Tax Policy Center said the average household making between $49,000 and $86,000 will save an average of $900 from the new law. The average household with earnings in the highest 1 percent of taxpayers (those who earn more than $733,000) will save an average of $51,000, according to the center.
Although changes to the tax brackets go into effect on Jan. 1, the Internal Revenue Service has to incorporate changes into its withholding tables and upload that information into companies’ payroll software, thus resulting in the delay.
During the transition to the new tax plan, individuals still will fall under 2017 tax brackets. Consequently, they eventually could receive a slightly higher tax refund for 2018, when they are reimbursed for the higher rates they paid during the transition period.
“We anticipate issuing the initial withholding guidance in January reflecting the new legislation, which would allow taxpayers to begin seeing the benefits of the change as early as February,” the IRS said in a statement last week. “The IRS will be working closely with the nation’s payroll and tax professional community during this process.”
Companies using software such as Quickbooks will receive automatic updates when the new tax bracket information becomes available. However, companies that complete payroll manually may experience a delay until a new tax booklet is provided in January.
It’s likely W-4 forms will receive an overhaul in March, as they are based on 2017 figures and it is unclear how allowances will factor into the tax changes.
“When these things come out, we quickly get a general overview, but it takes two to three weeks to figure out the details,” Fruci said. “We have classes and services to provide analysis of the rules and speculation on how the IRS is going to enforce (the tax changes).”