The new form W-4 – Time to revisit your withholding?
Leave it to the IRS to throw us a challenge – the new Form W-4 released for 2020 opened more questions than answers. While that may be frustrating for many, it presented a great learning opportunity for all of us here at JCCS. So we dove in and studied.
Start with the age-old question: Why fix what isn’t broken? Well, some taxpayers found out during the filing season for fiscal 2018 that something was broken. The federal 2017 Tax Cut & Jobs Act reduced tax rates for many, doubled the standard deduction and increased the child tax credit, all of which lowered the overall tax bill for many people. In an effort to align an individual’s withholding with the changes to the tax law, the IRS reduced the amount of tax withheld on taxpayers’ W-2 pay. In theory this seemed like a great plan – aiming to align federal income tax withholding from paychecks with a taxpayer’s federal tax liability – but for numerous taxpayers it wasn’t that simple. Many people found themselves suddenly owing taxes or receiving greatly reduced refunds from what they had seen in prior years.
As a result, this led to the largest overhaul of the Form W-4 in decades. Its goal: more accurate withholding for working taxpayers, starting with fiscal year 2020. In the past employees answered a series of questions to determine the number of “allowances” – or how much income was exempt from tax based on the number of dependents an employee had. But the new tax law did away with personal exemptions. As a result, the new W-4 now asks questions about filing status, household income, dependents and other tax deductions that will impact that employee’s annual tax obligation.
So, who needs to fill out this new form? Anyone starting a new job in 2020 will be required to fill out this updated form.
While it is not required for other employees, we strongly encourage everyone to review their own withholding and decide if it’s time to make some changes.
When should you evaluate your withholding status?
- Have you gotten married, divorced or widowed, given birth to or adopted a child, or had a child turn 17 this year?
- Has your household income recently changed? Did you take on a second job, did you change jobs, or did your spouse go back to work?
- Has there been any other life change that will impact your tax obligation in the coming year?
If you can answer yes to any of these questions, it’s a great time to reevaluate your withholding status and update your W-4. A tool for helping you evaluate your withholding, besides your CPA, is the IRS Tax Withholding Estimator found on the IRS website.
From our studies here, we’ve learned the new W-4 is a helpful tool for many working taxpayers as part of their tax planning strategy. But if you find yourself scratching your head wondering when or how or whether to fill out the new W-4, our team is always happy to help. Please give us a call.