The impact of tax reform brought about by the Tax Cuts and Jobs Act — also referred to as TCJA and Public Law 115-97 — could have both near-term and lasting ramifications for your organization and employees. This is why it's vital for all relevant departments to do their part in streamlining the transition.
To help employers get a handle on the changes, shortly after publishing the new withholding tables, on January 25, 2018, the IRS released Publication 15, the "Employer's Tax Guide." This document details the 2018 Percentage Method Tables and Wage Bracket Method Tables for Income Tax Withholding and is the official, comprehensive guide that finance leaders should review in depth with the HR, accounting and payroll departments in order to ensure full compliance and understand what employees need to know.
Impact of Tax Reform on Employees
As suggested above, the TCJA includes many significant tax and regulatory changes that can affect both employers and employees. For example, the elimination of personal exemptions ($4,050 per individual for 2017) is offset by the near doubling of the standard deduction per household.
The challenge comes in determining whether employees' full-year tax liability will be affected significantly enough, either by the TCJA or by changes in personal circumstances, to warrant submitting an updated Form W-4 to realign withholding amounts for 2018.
Failing to update this could potentially result in underwithholding, which in turn could mean a tax-due return for the employee instead of a refund.
Updating Form W-4
To help them better determine whether or not they should file a new W-4, direct employees to the IRS Withholding Calculator, which was released on February 28, 2018. Current employees may continue using their previously filed Form W-4, depending on their circumstances. But the IRS warns that the current tax tables and prior (2017) Forms W-4 are only likely to be accurate for those in the simplest of circumstances.
Particularly at risk are individuals and married couples who may have held multiple jobs throughout the year and itemized their deductions. The more-detailed Form W-4 for 2018 better accommodates the TCJA changes.
Employees who expect to be exempt from federal income tax liability will need to submit a new Form W-4 for 2018 indicating exemption. They can use the 2017 Form W-4, adjusting line 7 by striking "2017" and replacing with "2018." This method can be used for up to 30 days after the 2018 Form W-4 is released; i.e., until March 30.
Other Important Changes
Child tax credits were increased from $1,000 to $2,000 per child under age 17 and are refundable up to $1,400. The income cutoff threshold increased from $75,000 to $200,000 for individuals and from $110,000 to $400,000 for married couples, allowing more households to take advantage of the credit. See IRS Publication 972 for more details and qualifications for the Child Tax Credit. These changes are in effect from 2018 through 2025.
Additionally, parents may now use up to $10,000 per year from college 529 plans to help pay for their children's educational expenses, including tuition, tutoring and materials, from kindergarten through 12th grade — a boon for parents with children enrolled in private school.
Qualified unreimbursed medical expenses (preventive care, treatment, surgery, dental and vision) that exceed 7.5 percent of adjusted gross income are deductible for 2017 and 2018, with the threshold rising to 10 percent starting. January 1, 2019. Filers must file an IRS Form 1040 and include itemized deductions on a Schedule A, waiving the standard deduction.
Other significant changes include capping mortgage interest deductions at the first $750,000 of the loan, with no more deductions on interest for home equity lines of credit. Deductions are capped at $10,000 for state and local taxes between property, income or sales.
Responsible execution of these changes and a smooth transition for employees sends the message that finance leaders are attentive to the well-being of both their organization and their workforce.
To learn more about what your organization needs to know to fully understand the impact of tax reform on your business, click here for the full details in ADP's latest "Eye On Washington."
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