Last year’s tax season held some big surprises for quite a few people when they found out that they had been under-withholding and owed taxes when they typically get refunds. While the IRS did waive most of the underpayment penalties, they also decided to overhaul Form W-4 for employees to use starting in 2020. It is fairly different than what you are used to, so here is what you need to know to complete it accurately.
Goodbye to Withholding Allowances
Most of us are used to claiming allowances which allows us to determine how much tax is withheld from our paycheck. Claim more allowances and your paycheck is bigger. Claim fewer and more tax is withheld. Now employees will be asked to answer questions to determine how much is withheld, such as expected filing status, number of dependents, income from other sources, and deductions you plan to take. Based on your answers, your employer will make the necessary calculations and determine your withholding amount.
You Don’t Have to Fill Out a New Form
If you are happy with your current withholding, you don’t have to fill out a new form. But in many cases, it is a good idea to do so, particularly if you are expecting a major life change like getting married or divorced, having a child, starting a business, or buying a home. Ideally, your annual withholding and tax liability for each year should be as close as possible, so you might want to use the IRS’s Tax Withholding Estimator (or ask us) to see if you are on track in terms of withholding.
For Some, the New Form is Super Easy
If you have one job, don’t file a joint return with a working spouse, don’t have dependents, and don’t itemize anymore, you only have to fill in your name, address, social security number and filing status and you are done. However…
For Most People, It Is More Complicated
If you do any of the above mentioned things on your annual taxes, it will likely take more time to complete the form. This is because you have to provide your spouse’s income, your total deductions from last year’s taxes, any non-wage income you reported on your last return, and a few other tax-related things you probably don’t have memorized.
It Accounts for Tax Credits and Deductions
The new W-4 does make it easier to adjust your withholding in you have any tax credits or other deductions so less tax is withheld. Step 3 of the new form allows you to enter any tax credits you expect to take, including the child tax credit, educational tax credits, or foreign tax credits.
Help is Available
The IRS Tax Withholding Estimator can help you fill out the new W-4 accurately and look at various options as well. You will need to gather your return from last year, a recent pay stub (and your spouse’s if applicable), any 1099s, and potentially a few other documents as well. And if you want help with it, we are more than happy to work with you to make sure everything is as accurate as possible.