What Employers Need to Know About the New $1.5 Trillion Tax Law
President Trump recently signed a $1.5 trillion tax bill into law called the “Tax Cuts and Jobs Act of 2017,” the most sweeping overhaul of the US tax code since 1986. This legislative reform makes major changes to tax law, and significantly cuts corporate tax rates and makes small reductions to income tax rates for most individual tax brackets. Here’s a quick rundown of what you should know:
- The bill cuts the corporate tax rate to 21 percent from 35 percent, a move intended to drive economic growth. The economic reform has since spurred several large companies to respond by rewarding workers, such as American Airlines, Apple, AT&T, Comcast, Starbucks, Verizon, Walmart, and more. Coupled with other tax cuts, Trump and GOP leaders estimate that the bill will more than make up for the $1.5 trillion federal revenue lost over the next decade.
- Individual taxpayers will also receive tax cuts, but they’re only temporary, and much more modest. Compared to 2017, taxpayers will see a decrease of 0 to 4 percentage points (a single person earning less than $9,525 will continue with the same tax rate of 10 percent) withheld from their income in 2018. See all seven of the new tax brackets here. Employers have until February 15 to implement the new rates, as established by the IRS. The rates will end in 2025.
- Due to the lower tax withholding requirements, the U.S. Treasury estimates that 90 percent of U.S. workers will see an increase in their take-home pay in 2018. However, caution should be taken regarding the extra money freed up by the lower withholding — taxpayers could owe more during tax time and/or get a smaller refund.
- The bill nearly doubles the standard deduction to $24,000 for married couples, $18,000 for heads of households, and $12,000 for singles, which will be effective through 2025.
- The bill eliminates personal exemptions, which will be effective through 2025.
- The threshold for large inheritances that can be passed down has now doubled. Previously, Americans passing away could pass down up to $5.5 million tax-free or $11 million for married couples. Now, they can pass down up to $11 million tax-free, or $22 million for married couples through 2025.
- The bill eliminates the individual mandate under the Affordable Care Act mandate that stipulates individuals must be covered by a qualifying health plan or else face paying a penalty. This is effective for months beginning after December 31, 2018.
- Previously, the child tax credit was $1,000 and only partially refundable. Now, the current child tax credit has been doubled from $1,000 to $2,000 per child under the age of 17, allowing parents to receive up to $1,400 as a refund if the credit is larger than their federal income tax liability.
As stated above, employers have until February 15 to update their tax withholding to reflect the new bill, whether they be in charge of it or their payroll processor. Fingercheck will be updating withholding rates in February.
As an employer, you will not need to issue new W-4s to employees, although you can once the IRS has finished revising the W-4. In the meantime, the IRS recommends continuing to use the 2017 W-4 Form, as the new withholding tables are designed to work with the form that workers have already filed.