posted by: Radnor Financial Advisors
By now, you may have heard about the new tax laws that begin this year (you can read about them here). One of the lesser discussed ramifications of the new laws is the effect on federal tax withholding for W‐2 employees. Given the higher standard deduction and lower tax rates, the withholding schedules have been adjusted to reflect these changes.
When the new withholding rates come into effect (employers need to implement by February 15, 2018), employees may be delighted to see a few more bucks in the bank account than usual. If no adjustments are made to their W‐4, however, the same employees may be in for a not‐so‐delightful surprise next April.
The withholding rate adjustments will generally result in lower federal tax being withheld from employees’ paychecks. However, the new withholding rates will not factor in some major changes – the reduced AMT tax, expanded child credit, $10,000 cap on state and local taxes, etc. Those affected by the loss of personal exemptions, the repeal of miscellaneous deductions, and the $10,000 cap on state and local taxes may find that they either A) owe more tax than in previous years or B) owe tax when they’ve traditionally received a refund.
Additionally, in conjunction with the lower tax brackets, the statutory withholding rate on supplemental income – annual bonuses, equity vests, etc. – has been reduced from 25% to 22% (now 37% once over $1 million).
As such, it will behoove most taxpayers to consult their tax professionals and review their withholding rates once the changes come into effect.