With the Tax Cuts and Jobs Act (TCJA) being signed into law by President Donald Trump on Dec. 22, 2017, several changes to individual and business taxation were made. How those changes affect each taxpayer depends on that individual’s specific situation.
Below is a “big-picture” overview of various provisions affecting businesses and individuals, with more focused guidance on how the new law will affect employer withholding of employee income taxes.
Changes for individuals
The TCJA affects individual income taxes in a number of ways. While the law maintains the seven income brackets used in tax calculation, it reduces the tax rate for five of the brackets:
| Previous Rates | 10% | 15% | 25% | 28% | 33% | 35% | 39.6% |
| New Rates | 10% | 12% | 22% | 24% | 32% | 35% | 37% |
The new law has also changed the withholding rates for supplemental wages. For wages up to $1 million, the current rate is 22%, and for wages over $1 million, the current rate is 37% (previously 25% and 39.6%, respectively).
TCJA has eliminated the personal exemptions for individuals, spouse and dependents. Previously, a married taxpayer filing jointly could claim two exemptions: one for his or her spouse and another for themselves. In that instance, two exemptions of $4,050 each would reduce taxable income by $8,100 total.
While that exemption is gone, the TCJA nearly has doubled the standard deduction. Last year, the standard deduction was $6,350 for single filers and $12,700 for joint filers. For 2018, these levels increased to $12,000 for single and $24,000 for joint filers.
The TCJA makes several other specific changes to individual income taxes, including:
- The individual shared responsibility mandate within the Affordable Care Act (ACA) essentially has been removed, as the penalty for noncompliance will become $0, effective Jan. 1, 2019.
- Individuals no longer will be able to claim unreimbursed business expenses as itemized deductions.
- A $10,000 limit has been placed on the deductibility of other taxes (state income tax, property taxes, etc.).
- Donations to universities for athletic seating privileges are no longer deductible.
- The child tax credit will double from the previous $1,000 value, up to $2,000 per child.
Changes for businesses
Businesses will need to take note of several changes within the TCJA as well. One key change: The corporate tax rate has been reduced from 35% to 21%.
Additionally, a new short term incentive is in place for businesses who offer FMLA paid leave to their employees. Such businesses will receive a credit of 12.5% for every dollar paid for FMLA leave, up to 50% of an employee’s pay, with an additional 0.25% credit for every 1% paid above 50% of an employee’s pay.
Among various reductions or removal of deductible expenses that businesses should note include:
- transportation fringe benefits
- limitations for employer-operated eating facilities
- deduction limitations for pay to highly paid employees and C-level employees
- limitations to the write-offs for sexual harassment settlements
- limitations for the deductibility of entertainment expenses
All of the above items will need to be discussed with your CPA or tax counsel to determine how they apply to your situation.
Frequently asked questions from employers
Some of the most frequent questions we have received since the president’s signing of the law pertain to the withholding tables and Form W-4 questions.
Withholding tables
The IRS released the new 2018 withholding tables on Jan. 11 in Notice 1036, with more detailed guidance released on Jan. 29 in Notice 2018-14 and Publication 15. (These changes already have been implemented in the Paycom system, ahead of the Feb. 15 implementation deadline from the IRS.)
The IRS designed the 2018 withholding tables so that employees’ existing Form W-4 data could continue to be used. Therefore, the IRS does not require employees to complete a new W-4 for 2018.
Extensions to the 2017 Form W-4
The IRS currently is working on a new 2018 Form W-4 that will allow employees to modify their withholding to take full advantage of the changes in the TCJA. The new form’s expected release is after Feb. 15.
As a result, Notice 2018-14 highlights these items relating to the 2017 Form W-4:
- Existing 2017 Forms W-4 furnished to claim exemption from withholding for 2017 would be extended to Feb. 28, 2018.
- The 2017 Form W-4 may continue to be used temporarily to claim exemption from withholding in 2018.
- The agency temporarily has suspended the requirement that employees must furnish new Forms W-4 to employers within 10 days of changes in states that would reduce withholding allowances they may claim.
Allowances and exemptions
When discussing the effects of the TCJA, it is important to understand the distinction between “allowances,” as claimed on the W-4 that are used for withholding, and “exemptions” that an individual claims on a year-end tax return.
Historically, these numbers are usually the same. For instance, last year they were $4,050 per allowance in withholding and exemptions in year-end tax returns. The number of allowances claimed on the 2017 Form W-4 were multiplied by $4,050, and an employee’s annual wages were reduced by that product to arrive at taxable wages used in withholding calculations. If the employee claimed exemptions on his or her annual return, the number of exemptions claimed likewise was multiplied by the same $4,050 to reduce taxable income on the Form 1040 year-end return.
While the TCJA has eliminated exemptions for 2018, the allowances (as used in calculation of withholding) have not been eliminated; in fact, they were increased to a value of $4,150 per allowance claimed on the W-4. Thus, for every W-4 allowance claimed, an employee’s gross income will be reduced by $4,150 to arrive at taxable wages for use in the withholding calculation. However, no exemptions will be allowed on the employee’s Form 1040 at year-end; moving forward, it is anticipated the worksheet on the 2018 Form W-4 will not include exemptions in the calculation of withholding allowances.
Voluntary submission of 2018 Form W-4
While submitting a 2018 Form W-4 is not required by the IRS at this time, an employee may elect to do so. Employees should look at the 2018 W-4 once it is released, because of the removal of exemptions from the income tax provisions. Employees should calculate the allowances on the new form to determine if they would benefit by submitting a new Form W-4 to their employer to adjust their withholding.
Until the 2018 Form W-4 is released, an employee may voluntarily choose to submit a copy of the 2017 Form W-4 if he or she wants to adjust their withholding for the period prior to the 2018 form’s release.
The recent tax reform is complex, leaving many items to consider for your employees as they head into 2018. Businesses and employees alike would benefit from consulting tax counsel to help determine the most appropriate next steps for their specific situations.