“What the IRS is trying to do is to say to people, ‘Here is the new law: Are you sure your withholding choices are still right?,' ” said Mark Mazur, a tax expert at the nonpartisan Tax Policy Center who served in the Treasury Department under President Barack Obama. “The IRS does not want people to get to April and have a surprise where they realize they owe more than they thought, or that they could have had more money in their paycheck. You don’t want big surprises.”
The tax law's December passage ushered in sweeping changes to the tax code, lowering rates for millions of families and businesses, doubling the most common (or “standard”) deduction claimed by many middle-income workers and eliminating or capping deductions and other breaks claimed by millions. Businesses are trying to match their employees' planned federal tax payments with what they will pay under the new system, creating the need for the online calculator.
At a news conference at the Treasury Department, Secretary Steven Mnuchin downplayed the amount of confusion caused by the new law, noting that the withholding tables released last month “work pretty well” for the vast majority of Americans. He said this tool was primarily intended for households with particularly complicated tax situations.
“This is really about creating a tool for American taxpayers to check their withholdings,” Mnuchin told reporters. “I don't think the majority of Americans need to do anything.”
Acting IRS Commissioner David Kautter said about 90 percent of taxpayers would have “some adjustment one way or the other” to their withholdings, but it was hard to say how many of them needed to check them against their tables now. Households where two couples have incomes should also use the new tool, to account for the law's doubling of the Child Tax Credit, he said.
“I don't want to say every taxpayer needs to utilize the calculator, but it's been built to be fairly straightforward. It does a pretty good job of taking a complicated law and reducing it to understand the terms,” Kautter said. “I think it will be helpful for most people, even if you don't change your withholding, just to know what you're up against.”
Even with the new instructions for employers, workers' withholding could be miscalculated. At the news conference, IRS officials gave an example of a married couple with two children earning $75,000 annually. With the increase in the Child Tax Credit, that family would likely owe $1,742 at the end of the year — less than half of what the tables given employers would suggest.
If that family did not change the amount withheld by employers, they could reach tax season with far more saved than was needed — money they could have been spending or investing.
To use the tool on the IRS’s website, taxpayers are asked questions about their tax situations, including the number of deductions they take, whether they are filing as a couple and how much money they have been withholding from their paychecks. After all the information is entered, the calculator spits out an estimate of the expected taxes, as well as what their expected refunds or bills would be if they do not adjust their withholdings.
Getting an estimate requires answering well over a dozen questions, and taxpayers need a lot of information at their fingertips, like the amount they have withheld throughout the year so far, as well as adjustments to their income based on IRA contributions or student loan interest payments.
The new withholding tables may prove one of the Republican Party's best shots at demonstrating to the public that the tax law is bolstering their paychecks before November's 2018 midterm elections determine control of Congress. Americans will not file taxes under the new code until next spring, well beyond this fall's elections, but the withholding tables give them an opportunity to point to changes in take-home pay.
“People will not know exactly how it shakes out for them until they file approximately around a year from now, but take-home pay amounts show up right now,” said Leandra Lederman, a tax expert at Indiana University Bloomington.
In January, businesses across the country started using estimates released by the IRS designed to account for the changes. Americans who have straightforward tax filings and do not claim many deductions — the majority of the country — should have a relatively easy time gauging what they owe, Mazur said.
Millions of those with more complicated situations — particularly those who itemize their deductions or claim specialized tax breaks rather than taking the standard deduction — face a maze of changes that could be hard to game out under the new law. That could lead to unwelcome gaps between what Americans think they will be paying and their tax realities.
“Most people have been seeing bigger paychecks, without them being tailored to their own individual tax situations. That's a big part of the concern,” Lederman said. “People will be dismayed if it gets to tax time and they find out they unexpectedly owe, rather than getting a refund.”
Republicans have said the law, which centered on a massive corporate tax cut and temporary tax relief for most Americans, will spur widespread economic growth and business investments. Democrats have maintained that its relief for most workers is negligible and will do little to boost wages.
When new withholding tables were rolled out, Republicans touted stories of more robust pay for workers. Experts are still unsure how widespread that is. The amount of taxpayer savings will vary widely by incomes and states of residence, with a report by the Joint Committee on Taxation, Congress’s official scorekeeper, finding that only 44 percent of the country will get a tax reduction of more than $500.
“For the majority of Americans, the tax cuts just aren’t that large,” said David Gamage, a tax expert at Indiana University. “I’m skeptical of the notion that a large number of people will actually notice the small difference in take-home pay and be able to figure out how much of that is due to the tax law.”