New IRS withholding tables reflect lower tax rates, but Treasury says most people still will get refunds next year
New withholding tables are just phase one of a three-part implementation of the new tax laws' effects on workers' paychecks. Some folks will see more money each payday, but one thing won't change, says Treasury. Adjustments due to the Tax Cuts and Jobs Act changes won't stop people from overwithholding to intentionally get a big tax refund check.
If you regularly get a tax refund, the new tax law and associated payroll withholding won't change that.
That's the word today from the U.S. Treasury and Internal Revenue Service as the agencies released new payroll withholding tables to take the tax law changes enacted Jan. 1 as part of the Tax Cuts and Jobs Act (TCJA).
The tables are just the first in a three-stage process to implement withholding, which is the most direct contact most taxpayers have with taxes.
And charges that the Trump Administration could use the IRS and withholding amounts for political gain are false, according to the nation's financial agency leaders.
No "juicing" of payroll withholding: Some Democratic members of Congress recently raised concerns that the IRS might implement, at White House urging, payroll withholding in a way that front loads the amount of additional money they'll see in paychecks under the new tax rates and income brackets.
Treasury Secretary Steven Mnuchin says "absolutely not."
"We update the withholding tables every year. There's more work [this year], but again our objective is to get people money as quickly as possible," Mnuchin said during today's White House briefing following the release earlier in the day of the new tables.
In announcing the tables, the IRS noted that many employees will begin to see increases in their paychecks in February that reflect the TCJA changes. How early or late in February the tax-related pay changes show up will vary depending on how quickly the new tables are implemented by their employers and how often (weekly, biweekly or monthly) they are paid.
The bottom line, noted Mnuchin, is that once the new withholding amounts are in place, 90 percent of workers will see an increase in take-home pay because of the new tax law changes.
Those changes that affect payroll withholding in 2018 and tax years through 2025 include the increased standard deduction amounts, the elimination of personal exemptions and changes in tax rates and brackets.
Most workers will still get refunds: But the practical effects of workplace withholding won't change much, said Mnuchin.
Many workers deliberately decide to overwithhold taxes as a form of forced savings. The new 2018 withholding tables won't change that.
Using last year's old tax law withholding tables, approximately 76 percent of taxpayers withheld amounts so that they got refunds when they filed their returns, Mnuchin said.
Those workers should see the same result in 2019 when they file their 2018 tax returns, said the Treasury Secretary. And that, according to Mnuchin, was by design.
Treasury's Office of Tax Policy and the IRS worked overtime to ensure that that there won't be a material change in the number of taxpayers who get refunds next filing season, said Mnuchin. Instead, the objective of the new withholding system is to not to have taxpayers owe money at the end of the year.
Maintaining that refund level, Mnuchin said, is why Democratic charges of juicing the withholding tables so that taxpayers would see substantial tax-cut related paycheck increases in this mid-term election year are "ridiculous."
Democrats not convinced: On Jan. 8, Sen. Ron Wyden (D-Oregon) and Rep. Richard Neal (D-Massachusetts) sent a letter to the Treasury Department expressing concern that the new tables would "systematically underwithhold income taxes during the 2018 tax year."
While such pre-November 2018 election income could pay off politically for Congressional Republicans who pushed through the bill at the end of the year, Wyden and Neal said it could leave individuals "owing federal income tax when they file in 2019."
Mnuchin's comments today didn't convince Wyden, the ranking Democrat on the Senate Finance Committee.
"Republicans are using brute force and speed to implement a law that will deliver a financial blow to hardworking Americans all across the country," Wyden said in a statement released today after IRS revealed the 2018 withholding tables. "I look forward to GAO's [Government Accountability Office's] independent review of these tables, which will expose whether the Trump administration is tampering with Americans' paychecks, resulting in a whopping tax bill next year."
Three-part withholding process: Today's tax tables that workplaces and payroll companies will use to calculate how much income tax to take out of employees' checks is just the first step in the 2018 three-phase withholding process.
Mnuchin acknowledged that phase one meant using an outdated W-4 form for 2018 withholding purposes. He expressed confidence that the Treasury and IRS made the appropriate adjustments using existing technology in this first step.
"I give an enormous amount of credit to the team at Treasury and the team at the IRS who literally have been working around the clock through the holiday," Mnuchin said. "We had to figure out how to fit this in this format. … We wanted to make sure that people weren't overwithheld or underwittheld so we ran lots of models."
This first phase also was designed so that employees don't have to make any changes at this time to their W-4 forms, according to the IRS.
Phase two will be in February when the IRS releases an updated online withholding calculator. The IRS anticipates this will happen by the end of February.
When that's operational, taxpayers can go to IRS.gov and enter their personal information to see how many allowances to claim in connection with the tax law changes.
Mnuchin said Treasury and the IRS are planning an active education campaign to ensure that taxpayers know about the updated calculator and how to use it. This includes working with employers and payroll companies.
Acting IRS Commissioner David Kautter also conceded in today's announcement of the withholding tables that "payroll withholding can be complicated. … In the weeks ahead, the IRS will be providing more information to help people understand and review these changes."
The goal of the new online withholding calculator will be the same as it's always been — to adjust individual taxpayer withholding to avoid over- and underwithholding of tax during the year. It also will help folks update their withholding not just in response to the new law, but also because of changes in their personal circumstances this year.
Finally, phase three will be a new W-4 that Mnuchin promises will be "a super user-friendly form" that fits the new tax law. That revamped W-4 will be issued later this year.
Until that revised document is issued, employees and employers should continue to use the 2017 W-4, pictured above.
You can find more information on the tax law changes' effects on withholding in the IRS' FAQ page on the withholding tables.
And while they are designed for use by employers and payroll companies, you can check out the new withholding tables in the official IRS Notice 1036.
You also might find these items of interest:
- Most people pay more payroll tax than income taxes
- Your current W-4 will work with new tax law (for now)
- Got a refund? Paid a big tax bill? Time to adjust withholding!