Unless you’ve recently changed jobs, it’s unlikely you’ve noticed the newly overhauled W-4 withholdings form issued by the IRS.
In December 2019, the IRS finalized a revised version of this document to reflect changes tied to the Tax Cuts and Jobs Act, particularly the suspension of exemptions for dependents.
The new W-4 includes significant changes in how you declare withholding allowances. It eliminates the old system of inserting a 1, 2, 3 or more to reflect the number of allowances, with higher numbers indicating less money deducted for taxes. It also allows for withholding extra income if you have multiple jobs and provides a new tax withholding calculator to perform a paycheck review and customize or update withholdings.
We asked tax professionals to walk us through the new document, highlighting the most significant changes and what you need to know.
Steps 1 & 5
Step 1 and Step 5 of the new W-4 are the simplest parts of the updated form. Step 1 requires providing such information as your name, address and filing status, whether it happens to be single or married filing separately; married filing jointly; or head of household.
Step 5 of the new W-4 is the signature and date section of the form. Everything in between these two steps has changed.
Steps 2 & 4
In what may be a reflection of the flourishing gig economy, the latest version of the W-4 includes new sections (Step 2 and Step 4) where taxpayers can formally account income outside of your main job.
To help taxpayers complete these parts of the form, the IRS created a new online calculator. The tax withholding estimator walks users through a lengthy questionnaire to determine the most accurate tax withholding amount for you. The information resulting from this calculation is entered in Step 4c on the new W-4 form.
"It requires information about pension income, dividends, interest. … You need a lot of information handy,” said Paul Joseph, a certified public accountant and attorney who founded Joseph & Joseph Tax & Payroll. “It’s almost like you’re preparing your taxes now.”
It’s a good idea to have your most recent pay stub and tax returns handy when using the calculator.
Step 3: Claim dependents
The third part of the new W-4 allows for claiming a $2,000 credit per child under 17 in your household, replacing the former practice of declaring dependents by inserting a number such as 1, 2, 3 or 4. This new section also allows for taking a $500 credit for “other dependents,” such as an elderly parent.
Read our financial guide to caring for an elderly parent.
“A major change under the Tax Cuts and Jobs Act was the elimination of exemptions for members of your household,” said Steven Rossman, a certified public accountant for Drucker & Scaccetti. “To compensate for the loss of exemptions, the standard deduction was doubled and there are tax credits for qualifying children and other dependents.”
The $2,000 credit per child can only be claimed if your income is less than $200,000 as a single head of household or $400,000 if married filing jointly, said Rossman. If you’re eligible for these credits, and you claim them, your employer will adjust your withholdings accordingly.
Another note about Step 4
Step 4 of the new W-4 also allows employees to identify other income they might receive during the year not from jobs. This includes interest, dividends and retirement income. In this section, taxpayers can request additional taxes be withheld each pay period to compensate for any additional income.
“While you could always have a little extra withheld if you wanted to, now it is much more formalized,” said Rossman.
Do existing employees need to complete the new W-4?
Technically, no. If you’ve been employed by the same place for several years, you’re not required to complete a new W-4, said Rossman.
However, if you want to revise your withholdings using the new, in-depth IRS calculator, which allows for determining your estimated tax burden with more accuracy, it’s a good idea to update your W-4.
“The calculator provides a little report at the end, showing you what to pay if you want to break even in April or if you want to get a refund in April,” said Rossman. “Using the calculator, you can customize your withholdings to get a bigger refund or have a bigger balance due in April, whatever your desired outcome is.”
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Image: H. Armstrong Roberts (Getty)