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IRS reworks W-4 to help taxpayers withhold correct amounts

Withholding-paycheck

The Internal Revenue Service did do away with two versions of Form 1040 and shortened, a bit, the lone document we now use to file our annual tax returns.

But the tax agency went the other way with 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, 10-item form, the IRS' W-4 proposed revision takes up a full letter-sized page. And while there are just seven boxes to fill out, it asks taxpayers for more information than they've provided before.

This new draft Form W-4, pictured below, earns this week's By the Numbers honor.

W-4 Form 2020 tax year revisions by IRS per TCJA
Click image for a larger view.
You also can see the full draft 2020 Form W-4 with worksheets and instructions in PDF format.


"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. 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' online withholding calculator. It will help you figure out just how much federal income tax should be taken from your pay throughout the year.

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 this 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).

By now you know the big changes were nearly doubled standard deduction amounts, no more personal exempts for filers and their dependents and limits on some itemized deductions, notably state and local taxes (SALT).

Well, the IRS was just as unhappy about the lower refunds as were filers. OK, nobody was as upset as affected taxpayers.

But Uncle Sam's tax collector does want to help everyone get withholding right for future tax seasons under the new tax reform law. That means making the process, and amounts, as precise as possible.

Careful calculations: The ideal goal is to have your withholding come as close as possible to your final tax bill. That means you have use of your tax money throughout the year instead of handing over to the 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.

Hey, whatever works for you.

More, less, just right withholding: 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.

Adjust now and in 2020: 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.

If you were unhappy with your refund during this first filing season under the TCJA changes, you should, as one of ol blog's earlier Weekly Tax Tips suggested, make changes to your W-4 now. To do that, you'll use the current W-4 version.

The 2020 changes at this point are just proposals from the IRS, hence the "DRAFT" watermark on the image above. The IRS will finalize next year's W-4 later this year after considering what all us taxpayers and tax professionals think about the new form.

If you are so inclined to give the IRS your input on the proposed W-4, send your comments via email to WI.W4.Comments@IRS.gov by July 1.

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Comments

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Tamie Jones

Hi Kay, I have to say that I am pretty excited about this new straight forward W4 design. It has been difficult to get the form properly completed by the employee the first time with the current W4. Hopefully this new form will make it easier.

Bel

Every chance I have to educate individuals on what does and doesn't need to be completed and how to complete it I will take - this form could provide personal information to an employer that they simply do not need to have and could lead to bias and discrimination. That bothers me as most employees will not have a clue. I do because I worked in the upper echelons of corporate America - I know how data can and is used..... it often isn't a pretty picture or positive for the employee.

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