Updated Dec. 20, 2019
The Tax Cuts and Jobs Act (TCJA) has meant not only changes to the Internal Revenue Code, but also multiple revisions to various tax forms.
The annual tax return most of us must file each year obviously got a lot of attention. Now instead of three versions, there's only one Form 1040 for all of us to use. The Internal Revenue Service tweaked it even more in advance of the coming filing season.
But just as important is the Form W-4.
This form, officially titled Employee's Withholding Allowance Certificate, is what we give to our bosses to ensure that the correct amount of income taxes come out of our paychecks each pay period.
Now instead of a brief, easy-to-complete 10-item form, the IRS' W-4 proposed revision takes up a full letter-sized page.
And while there are just five sections at most to fill out, it asks taxpayers for more information than they've provided before.
The summer-time draft version of Form W-4 earned By the Numbers honors back in early June when it was released.
Now, as 2019 winds down, the IRS has finalized the form, pictured below.
New laws, new documents: The changes are part of the ongoing learning curve that both the IRS and taxpayers are working on as we adjust to the TCJA.
By now, we're all familiar with the tax reform law's major changes, like the nearly doubled standard deduction amounts, elimination of personal exemptions for filers and their dependents and limits on some itemized deductions, notably the still being contested state and local taxes (SALT) cap.
All of those things and more can affect just how much withholding we should have applied to our pay.
"The new draft Form W-4 reflects important feedback from the payroll community and others in the tax community," said IRS Commissioner Chuck Rettig in announcing the withholding form rewrite last summer. The agency previously issued a revision to true-up the W-4 to the TCJA, but pulled it back after concerns from the tax community.
"The primary goals of the new design are to provide simplicity, accuracy and privacy for employees while minimizing burden for employers and payroll processors," added Rettig.
More taxpayer questions: The proposed W-4 version for the 2020 tax year asks, for example, about multiple jobs you and, if married, your spouse might hold, as well as how much income y'all might have that doesn't have tax withheld, such as investment earnings or retirement income.
The new form also wants to know about the number of deductions you'll claim on your return.
In connection with those folks who depend on you, the new W-4 asks you to account for the $2,000 child tax credit for each qualifying youngster (basically kiddos younger than 17) or the new $500 credit for other qualifying dependents.
There's also a section that's a sort of mini Schedule A. Here, if you plan to itemize instead of claiming the standard amount, you can compute the amount of itemized expenses you expect you'll claim.
More info, but not for all: The draft W-4 form is divided into 5 steps, but not everyone needs to worry about all of them.
The only two steps required for all employees are Step 1, where you enter personal information like your name and filing status, and Step 5, where you sign the form.
If Steps 2, 3 and 4 apply to you, your withholding will more accurately match your tax liability if you complete them.
But if you don't, your withholding will be computed based on your filing status' standard deduction amount and tax rates, with no other adjustments.
Old school or online: To help you complete the 2020 version of W-4, the document contains a couple or worksheets.
Your best bet, however, is to use the IRS' new withholding estimator. The IRS says the online estimator is particularly helpful for taxpayers who:
- Expect to work only part of the year;
- Have dividend or capital gain income, or are subject to additional taxes, such as the additional Medicare tax;
- Have self-employment income (see below); or
- Prefer the most accurate withholding for multiple job situations.
Or, of course, if you work with a tax professional, you can set up a meeting with her or him to go over any W-4 changes you need to make.
Figure now for correct filing amount: The form changes were made in response to the 2019 filing season's debacle, where lots of folks were freaked out and, in many cases outraged, that they weren't getting the same size refunds to which they had become accustomed.
Yes, the smaller than expected refunds were, in many cases, the fault of taxpayers who didn't update their old W-4s to reflect the new filing realities of the Tax Cuts and Jobs Act (TCJA).
Well, the IRS was just as unhappy about the lower refunds as were filers. OK, nobody was as upset as affected taxpayers.
But still, Uncle Sam's tax collector does want to help everyone get withholding right for future tax seasons under the new tax reform law.
That will mean one less thing for the IRS to worry about when taxpayers provide the information to their employers to get the tax amount taken out of their paychecks is done as easily and precisely as possible.
Careful calculations: Under old and new tax laws, the ideal goal always has been to have your withholding come as close as possible to your final tax bill.
By doing that, you'll have use of your tax money throughout the year instead of handing it over to the U.S. Tax Bank to be held for more than a year without earning any interest.
A lot of folks, however, like using overwithholding as a forced savings account. The withholding amounts are out of sight, taken before they get their checks, and aren't accessible for impulse spending.
Personally, I always want more cash on hand. But hey, whatever works for you.
Life changes mean tax withholding changes: You should increase your withholding if you have more than one job at a time, if your spouse both have jobs or you have income from sources that are not subject to withholding.
If you do not make adjustments, you will likely owe additional tax when filing your tax return. You also could face interest and penalties for not having enough withheld throughout the year.
You should decrease your withholding if you are eligible for tax credits, such as the child tax credit or credit for other dependents. Less withholding also is recommended if you're eligible for other deductions beyond the standard deduction, i.e., you itemize.
And if you want a refund when you file your tax return, the IRS says the simplest way to increase your withholding is to enter on line 4c the additional amount you would like your employer to withhold from each paycheck after your Form W-4 takes effect.
Whatever your withholding choice, to make it work, you'll need to adjust your withholding to reflect the tax refund (or not) reality you want.
You also might find these items of interest:
- 5 tax refund myths busted
- Tax refunds are nice, but savings provide a better payoff
- IRS' new online app helps businesses withhold workers' correct tax amounts