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Why Did My Paycheck Just Get Bigger?

February 02, 2018

  • Most workers probably noticed larger paychecks in January
  • The extra cash is the result of tax cuts passed at the end of 2017
  • Most people will see between $500 and $2,000 more for 2018
3 min read

If you’re like a lot of workers, you probably noticed something important about your first paychecks in 2018–they got a bit fatter.

That’s right, roughly 80% of households are likely to see increases to their take-home pay following the federal tax cuts passed late last year.

In December, Congress passed something called the Tax Cut and Jobs Act. It’s the biggest tax legislation in more than a generation, and you can find out more about how it will affect you here.

The biggest winners are corporations, which will see their tax rates nearly sliced in half to 21%. But middle-income and lower-income consumers are also reaping the benefits now.

“For the vast majority of families this bill will mean less tax for their household, so more take-home pay,” Carlson says.

On average, families earning $150,000 or less annually are likely to see between $500 and $2,000 extra in take home pay this coming year, says Austin Carlson, a tax attorney and certified public account with law firm Gray Reed & McGraw, based in Dallas, Texas.

“For the vast majority of families this bill will mean less tax for their household, so more take-home pay,” Carlson says.

Bracket, bracket, brackets

The Internal Revenue Service (IRS) has established seven tax brackets for individuals and families, but it has lowered rates for five of those, and reshuffled income thresholds. So if you’re in one of those five brackets, you’re already seeing extra cash.

We’ve shown you these charts in other tax stories, but we’ll do it again to help clarify. Here are the changes to federal tax brackets for individuals and families.

Source: Wall Street Journal

Source: Wall Street Journal

Good to know: A tax bracket shows the percentage of tax you’ll pay, based on the gross income you earn. People pay a combination of federal, state, and local taxes, and your income is taxed progressively, which means it’s taxed at higher rate the more you make. Say you and your spouse jointly earn a combined $80,000. Under the new tax plan rates, the first $19,050 is taxed at 10%. The amount up to $77,400 is taxed at 12%. And the remaining $2,600 is taxed at the higher 22% rate.

What does this all mean?

If you lived–and worked–through the financial crisis that began in 2009, you would have noticed something similar to what’s going on now. In addition to a big fiscal stimulus package created to help the economy, Congress cut the federal payroll tax in 2010, which increased the average consumer’s paycheck by about 2%, or $1,000 for a year.

Now, a worker with gross annual income of $50,000–which means the amount before taxes are taken out–will see an increase of about $55 each pay period if he or she claims the standard deduction, according to a recent report. Similarly, A family earning $75,000 annually would see a jump up of about $84 per pay period.

Note: The standard deduction–or the amount of income free from taxes–for individuals and families will nearly double to $12,000 and $24,000 respectively. This amount is deducted from the gross annual income, and individuals pay taxes on the remainder of income.

(The median income for families in the U.S. is $59,039, according to the most recent data from the U.S. Census Bureau. A median is a mid-point, where half of all incomes are above, and half are below.)

While the current tax cuts are great for your paycheck now, it’s also important to keep in mind that they’re set to expire starting in 2025. At that point, Congress will have to vote to reauthorize them, or they’ll go away.

Enjoy the extra income while it lasts, and consider saving or investing it for a rainy day.

By Jeremy Quittner
Jeremy Quittner is the senior writer for Stash.

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