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Individuals may see increases in their paychecks as soon as February under updated 2018 withholding tables released by the IRS Jan. 11.
The new 2018 withholding tables reflect the increased standard deduction, repealed personal exemptions, and adjusted tax rates included in the 2017 tax law. Withholding allowance amounts were retained in employer withholding calculations for 2018, with the optional supplemental wage withholding rate set at 22 percent and the amount of additional wages to be added to tax calculations per pay period to nonresident aliens more than tripled, according to Notice 1036.
Employers should start using the 2018 withholding tables as soon as possible, “but not later than Feb. 15,” the Internal Revenue Service said in a news release (IR-2018-05).
“These new tables will help deliver the tax cuts as soon as possible to as many Americans as possible, with as little disruption as possible,” Treasury Secretary Steven Mnuchin said at a White House briefing.
Nine out of 10 taxpayers will see a boost in their take-home pay within the coming weeks, House Ways and Means Committee Chairman Kevin Brady (R-Texas) said in a Jan. 11 statement.
Lisa Zarlenga, a partner at Steptoe & Johnson LLP in Washington, told Bloomberg Tax in an email that “the tax law generally reduced individuals’ tax liabilities, so I expected that withholding would go down.”
The agency also published a list of frequently asked questions to accompany the new tables.
Notice 1036 is “the first in a series of steps that the IRS will take to help improve the accuracy of withholding following major changes made by the new tax law,” the agency said. The new tax law changed tax rates and eliminated personal exemptions, which had been the basis of withholding allowances.
For now, employers can use the 2017 Forms W-4, Employee’s Withholding Allowance Certificate, already filed by employees, in conjunction with the new tax act ( Pub. L. No. 115-97), the IRS said Dec. 26.
The agency said it is revising the Form W-4 and the online employee withholding calculator to reflect the new tax law, including changes in available itemized deductions, increases in the child tax credit, the new dependent credit, and the repeal of dependent exemptions.
“While these withholding tables are designed to work with Forms W-4 that employees have already provided to employers, it is possible that taxpayers may need to make changes to their Forms W-4,” Jennifer Breen, a partner in Morgan, Lewis & Bockius LLP’s Washington office, said in an email. “Taxpayers cannot make these changes until the revised Form W-4 is published, which the IRS has announced will be forthcoming in the coming months.”
The amount of one withholding allowance on an annual basis increased to $4,150 in 2018 from $4,050 in 2017, the IRS said.
For 2018, the withholding allowance amounts by payroll period will be:
Notice 1036 also said that employers could withhold on supplemental wages of up to $1 million at a flat rate of 22 percent. For supplemental wage amounts in excess of $1 million in a year, employers are required to apply the highest tax rate to those payments, 37 percent.
A backup withholding rate of 24 percent applies to non-employee compensation when individuals fail to provide proper tax identification information, the IRS said.
“In 2019, the IRS anticipates making further changes involving withholding,” the agency said in the FAQs. “The IRS will work with the business and payroll community to encourage workers to file new Forms W-4 next year and share information on changes in the new tax law that impact withholding.”
More than ever, employees have to examine their withholding to translate and match their expected tax liability in 2018, said Michael O’Toole, senior director of publications, education, and government relations with the American Payroll Association.
Based on the new tables, some employees could be in danger of tax underwithholding if they claim a significant number of withholding allowances, O’Toole told Bloomberg Tax.
The top Democrats on the House Ways and Means and the Senate Finance committees have raised concerns about whether the new tables could lead to systematic underwithholding.
The Treasury Department could be under “substantial pressure” to guarantee tax cuts to households by withholding too little from paychecks, Sen. Ron Wyden (D-Ore.) and Rep. Richard E. Neal (D-Mass.) said in a Jan. 8 letter to U.S. Comptroller General Gene L. Dodaro.
Wyden and Neal have asked the Government Accountability Office to investigate their concerns.
“I look forward to GAO’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,” Wyden said in a Jan. 11 news release.
The GAO is reviewing Wyden and Neal’s request, agency spokesman Charles Young said in a Jan. 11 email.
Texts of Notice 1036, the FAQs, and IR-2018-05 are in TaxCore.
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