I really tried to avoid talking about the tax plan, and couldn’t help myself. But that was more of a “feelings” piece, and less practical.
This article is coming from the other, more practical side.
In the U.S., our new tax plan has now gone into effect. We’re effectively “testing in production”, to borrow a phrase from the IT world. The rules were written so quickly, and without sufficient expert input, that while people are reasonably sure that most people will get some kind of tax cut, none of us really know whether they will be in one of those households, and whether the difference will be significant or paltry.
But it gets more interesting now. The IRS just released updated withholding tables. This is the thing that determines how much gets taken out of your check.
Now this might not seem like a big or interesting deal. Alas, everything is political, so we need to take a critical look at what’s about to happen, and what you may want to do to protect yourself.
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More money now means a bigger bill later
As you doubtlessly know from years in which you’ve had a tax surprise come April, if you take out the wrong amount from your paychecks, you can get a big windfall come tax time, or alternatively owe lots of money.
This kind of thing is hard to get right by even the professionals. And it’s not just a matter of tax bracket changes. The complex interplay between tax brackets, standard deduction (which almost doubled), personal exemptions (which don’t exist anymore), state/local/property taxes (which are now capped), means that there is a certain amount of calculational “hail mary” when deciding how much to withhold.
There is pressure from those who advocated for the tax cuts to adjust the withholding to be as low as possible. And why not? Taxes were lowered for most people, so there’s certainly no need to keep the same amount of withholding.
Except for those surprises. And let’s all admit that we don’t really know what our final tax bill is going to be come next year. That’s just the nature of the complex interplay of all the factors mentioned above.
So there is a decent possibility that the withholding might not be enough, and without changing anything else, it might lead to a sizable tax bill come the end of the year.
The cynical part of all this is the political calculus that those in power would want to give a bigger paycheck to most Americans, boosting their chances for electoral success, while the bill won’t come due until after the midterm elections, when it won’t be possible to do anything about it.
That’s really cynical, I know.
My suggested plan for that extra money
So here’s what I’d suggest, at least for the first year of this new tax plan:
Take any extra money you get this year, as compared to your paycheck last year, put it in a savings account, and don’t touch it.
Then, next year, when tax time rolls around, we’ll all see if our taxes really are lower, or whether we’ve had a tax equivalent of a “gotcha”.
While it might seem strange to suggest not taking advantage of any extra money (seeming to contradict the entire purpose of the tax cuts), the truth is that we just don’t know if the extra money is actually ours to keep. And we’re not going to truly know until next year.
While I understand that many of us are struggling, and could really use the extra cash, I think it would be much worse to spend extra money now, only to get hit next year with a big tax bill.
And if it turns out that my fears are unfounded, that the extra money really is ours to keep, well, we’ll have a jumpstart on paying off our debt, building up our emergency fund, or even saving for retirement, all things that most of us need to spend more time and focus on anyway.
But enough about me. Will you put your extra paycheck money away, or do you have a different plan for it?