We’re now three monthly paychecks into 2018 having just received pay stubs for March. Much press has centered around employee tax withholding since the new tax legislation passed in November. The bug question is whether or not employees will correctly withholding for their tax obligation due April, 2019. If employees find their withholding rates are inaccurate, it will be incumbent on the employees to tell their employers to make corrections. Having just reviewed my paycheck I found my federal withholding rate materially lower than in previous years. I’m guessing this significant and potential issue goes unnoticed by many employees. In short, tax planning this year will be critical given all the changes.
In the past Americans have generally adopted a more conservative approach to their tax obligations by over withholding throughout the year and thus receiving a tax refund. Typically, 76 percent of Americans who filed received a tax refund rather than owing the IRS in April. The IRS is predicting the level might fall to around 73 percent as a result of the new legislation, but I’m guessing things might be different this year as many of the previous assumptions about withholding rates have changed. In fact, it was only recently that the IRS provided employers with new withholding guidelines and new W-4 forms for employees.
The IRS is also providing an online workbook for tax fliers to estimate their withholding. Filers with simple tax situations are likely to get accurate paychecks, but many Americans, including those who tend to itemize their tax returns, will need to use the online tool to ensure they are not dramatically overpaying or underpaying for their taxes. The IRS and Treasury Department officials are encouraging tax filers to proactively use the new tax calculator to help them determine whether their paychecks are accurate.
Correct withholding and take home pay could be a big driver in personal consumption trends for 2018 as the new tax laws were designed to stimulate growth. In fact, it was reported last Wednesday that Q4, 2017 real gross domestic product (GDP) increased at an annual rate of 2.9 percent. Analysts had expected a 2.7% increase after initial reports of 2.5%. In the third quarter, real GDP increased 3.2 percent. Personal consumption played a big part of the increase and many economists cited the stimulative tax cuts as reasons for positive consumer sentiment.
While these fourth quarter real GDP reports were very favorable more recent trends in January and February for personal income, savings and expenditures suggest a more tepid consumer more apt to save then spend. As such, economists have lowered their first quarter of real GDP estimates to 1.5%.
In short, there are several takeaways from this news. First, in 2018 its real important to sit down with your accountant and review how the new legislation will impact your situation. If your situation is simple and your income mostly dependent on W-2 wage income, then the IRS online workbook might be helpful. In the many conversations we’ve had this year with CPAs the common answer to how the new tax laws impact families is a resounding “it depends”. Accountants say, “there are so many variables that could positively or negatively impact a tax payer and scenarios are endless”. Second, only time will tell how the consumer will behave once they find their paychecks have more disposable income as almost 80% of the economy is consumption driven.
Nicholas Hoffman & Co.