IRS releases draft W-4 to reflect tax law changes
Monday, June 25, 2018
The world — OK, U.S. tax world — is anxiously anticipating the shrinkage (yeah, I'm now replaying that Seinfeld episode in my head, too; sorry) of Form 1040.
The Treasury Secretary last week promised that by the time the 2019 tax filing season rolls around, the longest tax return, which is filed by 68 percent of taxpayers, will be substantially smaller. The goal is the long-promised size of a postcard.
But another Internal Revenue Service form that affects even more folks already has been revised.
The IRS earlier this month released a draft version of Form W-4 for the 2019 tax year. This is the document that salaried workers fill out so that their employers know how much tax to withhold each pay period.
In addition to the revamped W-4, officially titled Employee's Withholding Allowance Certificate, the tax agency also posted the draft form's instructions.
Substantial changes ahead: The withholding document has been remade to comply with the new provisions in the Tax Cuts and Jobs Act (TCJA).
The new tax law means that both the way companies will calculate withholding amounts and the information that workers are asked to supply on their W-4 forms to assist that process will be drastically different beginning next year.
The coming calculations will take into account, in part, non-wage income and tax credits instead of personal allowances, which for decades have been the basis for payroll withholding calculations. The personal exemptions upon which W-4 allowances were based are eliminated for tax years 2018 through 2025 under the TCJA.
Here are some of the key W-4 changes proposed in the IRS draft form.
A few more lines: While the 1040 might be getting smaller, not so the new W-4. The draft 2019 tax year form (that's an excerpt shown below) has 13 lines that fill a full page.
The 2018 W-4, shown in full below, has just 10 lines and takes up less than half of a page.
Filing status for allowance purposes: The 2019 draft W-4, as did the 2018 version, wants to know your filing status.
Line 3 on the 2019 version has checkboxes where you'll note whether you'll file as single or married filing separately, married filing jointly or head of household. The 2018 W-4 omits head of household status.
Your filing status determines, among other things, the amount of your standard deduction, which is increased in 2019. For W-4 purposes, this data also will be used by the IRS to automatically calculate your allowances, instead of you entering them as you did on the form's 2018 and earlier versions after arriving at the number on a separate worksheet.
Under TCJA changes, you'll get two allowances if single or married filing separately and three if married filing jointly or head of household.
Optional information: Lines 5 through 9 ask for more information so that your employer and the IRS can calculate a more accurate withholding amount.
For example, the draft W-4 notes that employees with more than one job or who are married filing jointly should enter amounts based on the highest paying job.
However, the draft instructions also say that you don't have to fill out these added lines even if they apply to your tax circumstances.
This could be the case, say, if you don't want your wage-paying boss to know that you're making money from other sources. Maybe you're worried that such info could affect any potential raises or promotions.
If you opt not to complete any of lines 5 through 9 (or line 10 for folks eligible to claim exemption from withholding; for you compulsive folks looking at both forms, the 2019 line 10 was line 7 on the 2018 Form W-4), your employer will base your withholding amount solely on your filing status.
Again, that might work out fine for you. But if you do have income from other than wages (for example, side hustles and/or investments) or you itemize or plan to claim some tax credits, the draft W-4's instructions note that filling out these lines will mean your withholding will be more accurate.
Withholding calculator recommended: Sure, you want your withholding to be accurate, but you're still uncomfortable with revealing to your boss how much you pull in from your Etsy sales.
To work around your privacy concerns and still provide solid W-4 data, the IRS suggests you use its online withholding calculator to come up with the additional amounts to enter on your new withholding form.
The calculator, which has been updated to reflect the new tax law, will help you come up with how much extra withholding to enter on line 9 (additional withholding per paycheck) or on line 7 (tax credits) to reduce your withholding. You then can leave the other lines blank.
The online calculator also is helpful if you have a more complex financial and tax situation, such as a seasonal job, you expect to work only part of the year, you receive dividends, capital gains or self-employment income or if you are subject to additional taxes like the net investment income tax (NIIT).
New form timing: Once the new W-4 form is finalized, employees will be strongly encouraged, but not required, to file it for the 2019 tax year. The IRS says its withholding tables and formulas are adjusted to take older W-4 forms into account.
I know that a lot of folks intentionally over-withhold, using their annual tax refund as a forced savings account. It's not my place to judge or decide what works for you. As I've said often, every person's financial and tax life is unique.
But given the changes under the new tax reform law, my recommendation is that when the official 2019 W-4 is available, you complete it and give it to your boss. That way you can get a baseline as to how much difference the tax changes make to your take-home pay. If you want to tweak it after that, fine.
And finally, this isn't a final form.
As the watermark notes on the version that the IRS has released, it's just a draft.
Before the IRS makes permanent changes to the 2019 Form W-4, it will take into account input from the public. You can tell the tax agency what you think of its draft W-4 by sending your comments to WI.W4.Comments@IRS.gov.
You also might find these items of interest:
- The many versions of IRS Form 1099
- It's time for itemizers to check payroll tax withholding
- Got a refund? Owe the IRS? Time for a Paycheck Checkup!
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