April 2, 2018
We are now three months into 2018 and there is still much confusion around the impact of the tax legislation passed in November. One big area of uncertainty is how to check whether tax withholdings from pay checks are correct. Having just reviewed my paycheck, I found my federal withholding rate materially lower than in previous years. I know our payroll services provider has applied the new tax tables, but it is hard for me to get completely comfortable with the new lower withholding level. After all, it was only recently that the IRS provided employers, and payroll services providers, with the new withholding guidelines and the new W-4 form for employees. Tax planning, and tax awareness, will be critical this year given all the changes.
In the past, Americans have generally adopted a conservative approach to their tax obligations by “over withholding” throughout the year and thus receiving a tax refund. Typically, 76 percent of Americans tax return filers received a refund in April of the following year. The IRS is predicting the level might fall to around 73 percent as a result of the new legislation. The IRS provides an online workbook for tax filers to estimate their withholding. The IRS and Treasury Department officials are encouraging tax filers to be proactive, and use the new tax calculator to help them determine whether their withholdings are appropriate.
Take home pay is likely to be a big driver of personal consumption trends in 2018, and, of course, the new tax laws were designed to stimulate growth. Last Wednesday, the growth of real gross domestic product (GDP) for the fourth quarter of 2017 was revised upwards to an annual rate of 2.9 percent. This impressive growth rate was achieved before the impact of the new tax laws. By comparison, early data for January and February on personal income, savings and expenditures, suggest consumers were more apt to save then spend. Estimates for Q1 2018 GDP growth are running at around 1.5%, although this might also be affected by the tendency for first quarter growth to be sluggish.
There are a couple of takeaways from the above. First, it is probably a good idea for some Americans to sit down with their accountant and review how the new legislation will impact their situation. If the situation is simple, with income mostly dependent on W-2 earnings, then the IRS online workbook might be helpful. The many conversations we already had this year with CPAs have revealed that tax accountants are still working through the many nuances of the new tax laws, and the seemingly endless scenarios for individual tax payers. Second, consumers are just now beginning to find they have more disposable income because their withholdings have decreased. Only time will tell what behavior will result – and remember almost 80% of the economy is consumption driven.
Gary B. Martin