The tax reform bill that just became law late last year won't show up on your tax returns until you file in 2019. But workers are about to see the immediate impact of the bill in their paychecks, because the IRS just released its new withholding tables for 2018 that take tax reform into account.
Calculating withholding is a complicated procedure that requires taking several different things into account. A look at some simple examples for people in common situations can give you a better sense of what impact you're likely to see in your paycheck.
Single person, no children, $25,000 in earnings
For those who are just starting out or have a fairly low-paying job, the biggest part of tax reform was the increase in the standard deduction. You'd therefore expect less tax to get withheld from the paycheck of a single person with no dependents.
To calculate withholding, you first need to know how many withholding allowances are allowed. For most single people with no children, one withholding allowance is appropriate. In 2017, that reduced average weekly earnings of $480.77 by $77.90, and the remaining $402.87 produced withholding of $44.83 per week.
In 2018, the value of the withholding allowance goes up to $79.80, and different rates apply to the remaining $400.97. The result of running the numbers through the new formula is $35.94 per week. That will give the typical worker about a $9 weekly rise in take-home pay, or $462 over the course of a 52-week year.
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Married person, two children, $75,000 in earnings
Families saw a number of impacts in the tax reform package. Higher standard deductions were offset by lost personal exemptions. However, higher child tax credits also apply going forward. Overall, it wasn't clear what the impact on every married couple would be, even under simplified assumptions involving just taking the standard deduction. Such a family would often get four withholding allowances.
For 2017, using the tables for someone who gets paid twice a month, earnings of $3,125 per pay period would get reduced by $168.80 multiplied by four withholding allowances, resulting in $2,449.80. Run that through the brackets, and tax withheld would add up to $274.57 per pay period.
Under 2018 rules, withholding allowances for those paid twice a month are worth $172.90 each, making the after-allowance pay $2,433.40. The new formula produces $218.40 in withholding under those assumptions. That $56 difference adds up to almost $1,350 over the course of 24 pay periods in a year.
Single head of household, one child, $300,000 in earnings
Many people criticized tax reform because they saw it as being unfairly weighted toward helping high-income people. The withholding tables bear this out, at least in the size of the tax benefit that they produce.