Trump is changing your paycheck. Here's how.

Columnist
Yahoo Finance

 

Your paycheck will probably be getting bigger soon.

The IRS has issued the first set of guidelines determining how every American’s paycheck will change following the tax-cut bill President Trump signed in late December. The guidelines go to employers and payroll processors, which will then adjust the amount of tax withheld from workers’ paychecks.

Yahoo Finance ran the numbers and found a net drop in tax withheld in each of 11 income categories we examined. That means paychecks would get larger in each of those income categories. For a worker earning $60,000, which is roughly the national median income, the net savings would be $112 per month, or $1,344 per year.

This table shows how federal tax withholdings on a semi-monthly paycheck for a married worker are likely to change from 2017 to 2018:

Source: IRS, Yahoo Finance
Source: IRS, Yahoo Finance

This is a simplified analysis that doesn’t account for pre-tax deductions of other provisions that affect many workers’ take-home pay. It’s also important to note that the increase in net pay that shows up on all 2018 paychecks won’t necessarily be the same thing as the total change in a worker’s tax bill for 2018. The Trump tax law changed many things. One of those changes was the withholding tables, which determine what tax rate applies to what level of income. The new law lowers the tax bracket for many (but not all) workers, which is why many people’s paychecks will get larger.

But the law also axed some key tax breaks, such as the personal exemption, while doubling the standard deduction for most people. For families with fewer than three dependent kids, that’s probably a net gain. But for larger families it could push up their taxable income and their total tax bill. The law also caps the total amount of allowed deductions for state and local taxes at $10,000, which will amount to a big hit for some taxpayers with high income, property or school taxes at the state and local level.

Deductions aren’t automatically taken into account when employers set the amount of federal tax withheld from paychecks, which is why some workers ask their companies to withhold more or less than the recommended amount, which they’re still allowed to do. Some experts worry that mistakes by the IRS or employers could lead some taxpayers to underpay in 2018 and end up with too little taken out of their checks in 2018 to cover their total tax bill.

Employers are likely to start changing the tax withholdings by mid-February, which means workers will see the change in their paychecks within weeks. Republicans who passed the tax bill, with no support from Democrats, hope voters will reward GOP politicians for their largesse when midterm elections arrive next November. But Democrats are sure to point out that some wealthy earners will save millions while the middle-class tax cuts are modest. Voters will have to decide how much they like free money.

Confidential tip line: rickjnewman@yahoo.com. Encrypted communication available.

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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman

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