Your paycheck is about to be reshaped by the recently passed Republican tax plan. And the changes are coming so quickly that your employer may not have all the information needed to avoid errors that could lead to a nasty shock come April 2019.
So Thursday, the Treasury Department released general guidelines for businesses and recommended that workers double-check their pay stubs using an online calculator, not yet available, when the changes take effect mid-February.
Here’s the basic issue. Most Americans are expected to benefit from the tax cuts — as many as 80 percent, according to the Tax Policy Center. But the way the extra money will actually filter into peoples’ pockets can be pretty circuitous.
There won’t be a “tax cut rebate” line on your paychecks. Instead, companies will reduce the amount of money they automatically withhold from your paycheck to prepay your state and federal taxes. And as the withholding shrinks, take home pay goes up.
Trouble is, it’s tricky for companies to figure out precisely how much to reduce employees’ withholdings because they don’t have enough individualized information.
Most of what they do know comes from now-outdated W-4 forms. W-4s have worksheets that help you calculate deductions and allowances that are based on the old rules. They also lack key details like property tax obligations, newly important now that there’s cap on the deduction for state and local taxes. Without this information, employers can’t easily tell who’ll hit this cap, and what might mean for withholdings.
New W-4 forms aren’t expected until later this year, so for now companies have to make do with the information they have — along with the guidance from Treasury.
Until the paychecks start to appear, it’s hard to say whether this makeshift approach will suffice. The goal, according to the Treasury Department, is to maintain current practice, where most Americans actually overpay their taxes throughout the year, withholding too much from their paychecks and then receiving a rebate.
But come April 2019 — when people make their first official filing under the new rules — some families may discover that their reduced withholdings were inadequate, and that they owe the IRS an oversized check.
And while it might be nice if businesses could warn the most vulnerable employees, that’s tough to figure out — not without the updated W-4 information. Which is why the IRS is developing an online withholdings calculator, so people can get an estimate that’s better-tailored to their specific situation.
For those planning to take the standard deduction, the risk is slight. But if you’re a high-earner, or plan to itemize, it might be wise to try that calculator when it becomes available, lest you find yourself facing an unpleasant surprise next April.Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the U.S. He can be reached at email@example.com. Follow him on Twitter @GlobeHorowitz