By Tina Orem – NerdWallet.com
Sometime in February, you might see a change in your paycheck, courtesy of the new tax rules that were all over the headlines before the holidays and which (mostly) took effect on Jan. 1. Here’s what’s going on and what you can do about it.
The amount of tax withheld from your paycheck will probably change at some point in February. The exact timing will depend on when your employer switches to the new tax withholding tables and how often you’re paid. The good news is you’ll likely see a little more money in your check: The Treasury Department estimates 90% of wage earners will see an increase in take-home pay due to the change.
“I think that on average, people will see their paychecks go up by about 1% to 2%,” says Mike Sylvester, a certified public accountant at Small Business Services CPA Group in Fort Wayne, Indiana.
Taxes are a pay-as-you-go arrangement in the United States. When you earn money, the IRS wants its cut as soon as possible. That’s why employers withhold taxes from employee paychecks.
Form W-4, which you probably filled out when you started your job, gives you some control over how much is withheld from your check. What you put on your W-4 gets funneled through something called withholding tables, which your company’s payroll department uses to calculate exactly how much federal and state tax to withhold. The amount is largely based on your wages, marital status and the number of withholding allowances you claim on your W-4.
The recent tax overhaul changed a ton of tax rules starting Jan. 1, including shifting the tax brackets, increasing the standard deduction and eliminating personal exemptions. That meant the withholding tables had to change, so the IRS reissued them on Jan. 11. It wants employers to start using the new withholding tables no later than Feb. 15.
If you see more money in your check in February, don’t start spending it, not even in your mind. After all, your payroll taxes probably aren’t your whole tax picture, Sylvester warns. A new $10,000 limit on the deduction for state and local taxes means that people in high-tax states, for example, might be better off setting that extra money aside until they see where the chips fall when they do their 2018 taxes, he says. Under the new tax rules, you might lose some tax deductions — but you also might move to a lower tax bracket.
Last April, did you get hit with a giant tax bill or, conversely, score an enormous refund? If so, now may be a good time to make a better plan for your withholdings. If you don’t withhold enough throughout the year, you might owe again when you file your return in April 2019. If you withhold too much, you might get another refund — but you’ll live on less of your paycheck in the meantime.
Before you whip out a blank W-4 and the calculator, check your withholdings after the changes take effect in February and finish your 2017 tax return so you can see what you have to work with, says Chris Whalen, a CPA in Red Bank, New Jersey. (You can get a sense of where you stand sooner by using a tax calculator.) If you want to change your withholdings at that point, fill out a new W-4 and give it to your employer; you can get the form at IRS.gov or from your payroll people. You don’t have to fill out a new W-4 just because the tax rules changed. But you can change your W-4 at any time you want.
This article was originally published at NerdWallet.com