Tax season is fast approaching, and for many individuals that means the anticipation of a tax refund check in their bank accounts. However, many people were shocked in 2019 when they discovered their refund amount was substantially lower or they even owed the IRS money.
The 2017 Tax Cuts and Jobs Act (TCJA) significantly changed how the federal tax system works. These tax changes didn’t always work well with the traditional W-4 form, resulting in many people not having enough taxes withheld from their paychecks in 2018 to cover the taxes they owed. As a result, there is a new version of the W-4 form for employees to use starting in 2020 which is intended to make withholding more accurate in conjunction with the TCJA.
What is a Form W-4?
For some, a W-4 was something filled out years ago when you started your first job and confusingly asked your parents if you were a “dependent” and never thought of again. In fact, a recent study by the American Institute of Certified Public Accountants (AICPA) shows that 45% percent of Americans are unsure when the last time their withholdings were updated, and 11% of taxpayers had never heard of a W-4.
A W-4 is an IRS form employees are required to fill out so that an employer can withhold the correct federal income tax from their pay. Ultimately, the goal of proper withholding is that you neither owe nor are owed when filing your yearly tax return. Too little withholding can result in a substantial tax payment and possibly even penalty payments. Too much withholding results in a refund check, which may seem nice, but essentially you allowed the IRS to hold your money interest free—money that could have been possibly better spent staying current on bills, paying down debt or being invested.
What’s Changed on the W-4?
The old Form W-4 required employees to input the number of allowances they were claiming and any additional amount they wanted to be withheld. There were worksheets designed to assist employees in entering the proper number of allowances, but many found these to be complicated.
There are no more withholding allowances on the new Form W-4. Instead, employees provide their employer with the information needed to determine the amount of income tax to withhold and the employer takes it from there and does the necessary calculations. Employees will be asked to include items such as expected filing status, family income from other jobs, number of dependents and tax deductions they plan to take. This may mean the W-4 could possibly take a little longer to fill out because the necessary information will have to be collected.
Do I Have to Complete the New Form?
The short answer to this question is “no.” Existing employees are not required to complete a new Form W-4. If employees are happy with their current withholding, the old W-4 stays in effect indefinitely. However, if individuals want their withholding to be more accurate and aligned with current tax laws, they should fill out a new Form W-4. All new hires will have to complete the updated form, as should individuals with changes to their filing status.
Contact an Anders advisor below to discuss how recent changes in tax law, withholdings, and proper planning can help you achieve your tax and financial goals.
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