The tax cuts for individuals in the new law President Donald Trump signed in December are the result of lower individual tax brackets, which raise the amount of income that's taxed at the new lower rates. The standard deduction that's claimed by about 75 percent of taxpayers is also doubled (but the old personal exemptions are eliminated).
Most workers will see an increase in take-home pay when employers adopt new payroll withholding tables that reduce the federal tax withheld from workers' pay. Here's how that works, how you can find out how much your take-home pay could increase and when you can expect to see that bump.
Every year, the IRS issues Notice 1036, Percentage Method Tables for Income Tax Withholding, which employers use as a guideline for withholding taxes. These tables specify the amount to be withheld based on workers' withholding status (single or married), the number of withholding allowances, the number of the employer's pay periods (weekly, biweekly, etc.) and the amount of wages paid for each period.
The tables are typically issued each year in early December for the following year. So for 2017, Notice 1036 was issued on Dec. 6, 2016, which gave employers ample time to adopt them and make changes in time for the first payroll cycle of 2017.
But since the new tax law was adopted on Dec. 22, the IRS was unable to issue the new and revised Notice 1036 for 2018 until this week -- a month later than usual. Now that it has been released, employers are on the hot seat to get the new lower withholding tables into their payroll systems as soon as possible.
Exactly how much your take-home pay will increase depends on your withholding status, number of allowances and amount of your gross pay each pay period. To give you an idea, here are several examples.
Take-home pay for a person claiming single status and one withholding allowance, with gross annual income of $50,000 paid biweekly, would increase by about $55 per pay period, or approximately $1,440 per year.
For a person claiming single status and one withholding allowance, with gross annual income of $75,000 paid biweekly, net take home pay would increase by about $84 per pay period, or approximately $2,190 per year.
For a worker claiming married status and two withholding allowances, with gross annual income of $75,000 paid biweekly, net take home pay would increase by about $61 per pay period, or approximately $1,590 per year.
For a worker claiming married status and two withholding allowances, with gross annual income of $100,000 paid biweekly, net take home pay would increase by about $107 per pay period, or approximately $2,777 per year.
To get a sense of how much your take-home pay could increase, refer to Notice 1036 and use the parameters for your specific situation to get a reasonably close estimate.
Of course, it's important to understand the difference between what's withheld from your pay and what you may actually owe in federal taxes. The latter requires completion of your 2018 tax return, in which you calculate your adjusted gross income, deductions and tax credits, and arrive at your taxable income.
Your actual income tax is computed by finding your taxable income amount in the new tax tables, then comparing that to what your paid (through withholding, prior-year refunds applied and estimated tax payments). If your tax payments are more than your tax liability, you'll have a tax refund. If not, you'll owe additional tax.
It's hard to calculate exactly how the new tax law will affect your situation until next year, but in the meantime, ask your employer to update its withholding tables quickly. Then enjoy whatever extra take-home pay you actually get.