Latest Changes to the IRS Form W-4 and its Effect on Tax Payers

The Tax Cuts & Jobs Act (TCJA) is a complex legislature, and the Internal Revenue Services (IRS) is making efforts to help taxpayers in figuring out their withholding under the law.  In 2018, the IRS released an updated version of the Employee’s Withholding Allowance Certificate or Form W-4. The form was again updated in 2019. What are these changes and how it is going to affect the taxpayers? Let’s find out.

What is Form W-4?

Form W-4 holds information about the taxpayer and their detailed financial status. The taxpayers first fill it out when they start a new job. It is recommended that a new form be filled at the beginning of each year. The form is also filled when there is a change in the personal or financial status of the taxpayer. This can include taking up a new job or getting married. The taxpayer has to fill it and submit it to the employer. The employer then determines the amount of tax to withhold from their employee’s or taxpayer’s paycheck.

Changes in 2018

In 2018, the updated Form W-4 had a significant bearing on the personal exemptions in withholdings.

The older version calculated tax withholdings depending on the personal exemptions for the individuals, their dependents, and their spouses.

So, a family with more than one breadwinner, people with more than one job, parents who claim child tax credit, people with elderly dependents, people with high incomes or taxpayers with complex tax returns had to make changes in the way they report their withholdings.

Changes in 2019

The Form W-4 was again updated in 2019, and the changes will come into effect in 2020. The goal of these updates is to increase the accuracy of the current withholding system and improve its transparency.

The new form does make it easier for people with a constant income to file their taxes easily; the same cannot be said for others.

Reduced Number of Allowances

The big change in the update was the elimination of Line 5 that required the taxpayer to list the “Total number of allowances you’re claiming”. Instead of claiming allowances on withholding, employees can provide total amount for additional non-wage income, expected income tax credits, and so on.

Head of Household

Apart from the existing Married Filing Jointly and Single boxes, IRS added a third table under Marital Status – Head of Household.

Non-wage Income

Required employees to provide estimated nonwage income, which is not subject to withholding like interest and dividends. Earlier, only significant non-wage income had to be declared.

Changes in Deductions

Employees can now provide annual deduction totals instead of converting them to equivalent withholding allowances.

Tax Credits

The total tax credits for a year can be directly used for payroll systems without the need to translate them into additional withholding allowances.

With the 2019 Form W-4, full-year tax credit amounts will be directly entered into payroll systems.

What Taxpayers Need to Do?

With the changes in the Form W-4, the first thing that taxpayers should do is visit the IRS website and use the Withholding Calculator. The updated Calculator will help you decide if more or less tax should be withheld from your paycheck. If there is a need to change, you should fill out a new Form W-4.

With the annual changes in the Form W-4, it is advisable to keep a tab on your tax liability every year. Otherwise you will either receive with a big tax bill next year or end up parking your money with the Government without any interest.

If you are not sure how to calculate your tax liability you should consult a tax professional prior to making any changes.

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