The Targeted Cuts & Jobs Act (TCJA) was a significant change in federal income tax law which became effective January of 2018. Tax law changes included elimination of “exemptions/allowances” as tax deductions, increased standard deductions for those who do not itemize their deductions, increased tax credits for children under the age of 17 and other dependents, and new tax rate tables.
For years 2018 and 2019, the IRS has attempted to use the long-time system of withholding taxes based on W-4 forms which are based on “exemptions/allowances”—-married claiming 4, single claiming zero, so forth and so on—–all of which had no “tax value” for the past 2 years due to TCJA. The IRS attempted to resolve this inconsistency of W-4’s with the new tax law by creating tax tables based on the eliminated exemptions, but only as a “bandaid” until the IRS had time to totally revise the W-4 to be consistent with the new TCJA tax law
The IRS has now released what appears to be their final “draft” copy of the new W-4 form, which does not ask for your number of exemptions to “claim”—-in it’s simplest form, it simply has an employee check their filing status (single, married or head of household), uses the standard deduction amounts assigned to those filing statuses ($12,200 for Single, $18,350 for HOH, and $24,400 for married filing jointly), and calculates federal income tax withholding based on filing status, standard deductions and an employee’s income level from the job pertaining to the W-4 form. The new W-4 does not request any information about the “number of exemptions/allowances claimed”, since those deductions were eliminated from the law January of 2018.
The brand new W-4 only requires that an employee complete their filing status and administrative data in “Step 1” of the W-4, and sign/date the W-4 in “Step 5”, and submit the completed W-4 to their employer as the basis for their federal income tax withholding amounts.
For taxpayers without children/other dependents, with a single job, no unusual deductions, a simple W-4 with Steps 1 and 5 completed will be reasonably accurate—-and will error on the side of creating refunds.
For taxpayers with multiple jobs, children under the age of 17, those who are paying for college education costs and claiming the education tax credit, they would be well advised to complete Steps 2-4 of the new W-4, which will enable them to report those anticipated tax credits and deductions, as well as other non-wage income if they choose, to their employer.
SUMMARY
Completing Steps 1 and 5 of the brand new W-4 form will be fine for those taxpayers who do not have multiple jobs (including a spouse’s job), child tax and education tax credits, or other more complex tax scenarios—-this “simple” W-4 will be fine for the vast majority of individuals. For those individuals with children/dependents and more complex tax returns, they should complete all “steps” of the W-4 for the most accurate tax withholdings for their fact patterns
A DRAFT OF THE NEW 2020 W-4, WITH INSTRUCTIONS, CAN BE FOUND HERE.
SOME ADVICE FOR EMPLOYERS BEFORE WE TAKE A DEEPER DIVE INTO HOW TO COMPLETE THE 2020 W-4 IS AS FOLLOWS:
1. Employers are not required to obtain the new 2020 W-4 forms for existing employees. W-4 forms on file can be used since the IRS tax withholding tables will be used for both new and old W-4 forms. Those employees who choose to use the old W-4 form based on allowances will likely not have as accurate of federal income tax withholding as employees who do complete the new W-4 designed for 2020. Employers are required to provide the new W-4 form for all new hires after 2019;
2. We suggest that employers provide notices to their employees suggesting that they complete the new 2020 W-4 forms for the most accurate tax withholdings. Feel free to “cut and paste” the following as a notice to your existing employees:
The IRS has prepared brand new W-4 forms for 2020, which are intended to more accurately withhold federal income taxes from your paychecks. We encourage you to carefully complete the new W-4 form and return it to us before January of 2020, but you are not required to do so. Your 2020 paychecks will withhold federal income tax from your checks based on the new W-4 form or the one we already have on file.
3. Also feel free to use this AccuPay “writeup” to explain the differences between the old and new W-4’s by giving it to your existing employees along with copies of the brand new W-4 forms for their use; and
4. We believe that employers will be required to enter all of the new W-4 information into their payroll system, to include the amount of child tax and other tax credit amounts, deduction amounts on the W-4, along with the employee’s filing status, and this information, along with the wage amounts, will calculate federal income tax withholdings. NOBODY WILL BE ENTERING EXEMPTION/ALLOWANCE FIGURES SUCH AS 4, zero, etc. AccuPay clients will be providing a copy of the W-4 to us to replace the previous W-4 information we have on file for your employees.
EMPLOYEE ADVICE ON COMPLETING THE NEW W-4 FORM
Employees with a single job, no children under age 17, and who do not itemize their deductions (the increased standard deduction amounts due to the new tax law eliminate the advantage of “itemizing” for the majority of taxpayers)—–Simply complete Step 1 to include your “filing status”, sign and date Step 5, and give it to your employer—–5 minutes or less of time to do this AND a better choice than using the previous W-4 on file with the employer
Employees can choose to more closely estimate their federal income tax withholdings by completing Steps 2, 3 and 4 of their W-4, as follows:
Step 2
Completing this step is advised for 2 earner couples who file “married filing jointly”, or for an individual with more than one W-2 job. The purpose of Step 2 is to calculate additional federal income tax when multiple jobs put a person in a higher combined federal income tax bracket than a single W-2 job alone. 3 options exist to eliminate the “withholding shortfall” often occurring as a result of multiple jobs
Option #1 is to complete the federal Tax Withholding Estimator which guides a taxpayer through a series of data input screens, which are designed to project a taxpayer’s annual federal income tax liability. An individual can also complete the “multiple jobs worksheet” on page 3 of the new W-4 which is designed to calculate additional federal income tax from a “set of tax tables” which “intersect” the tax rates of both the higher paying W-2 with the lower wage W-2, in effect calculating extra federal income tax needing to be withheld due to both jobs putting a taxpayer in a higher tax bracket than one job alone. Option 3 is that both married taxpayers check a box which indicates that they have multiple jobs on their Form 1040.
Step 3
This step should only be completed on the W-4 form for the “highest paying job” taxpayer. This is an important step since it allows a taxpayer to claim a reduction in federal tax withholdings based on claiming dependents on their annual Form 1040, especially for child dependents who will be under age 17 at the end of the tax year.
The child tax credit for a dependent child under 17 is $2,000 with a $500 tax credit for older children, parents, etc. ALSO, taxpayers who are entitled to claim education tax credits (most commonly, paying for college educations) should estimate their education tax credit amount and include that tax credit amount in the total figure on Step 3—-combine the education tax credit with the child tax and other types of tax credits (the Tax Withholding Estimator includes examples of common federal income tax credits to be totaled in Step 3).
Please remember that a “tax credit” is worth dollar for dollar in federal income tax savings whereas a tax deduction is only worth 15-35 cents on the dollar—-credits are far more valuable than deductions!!
Step 4
This step enables taxpayers who itemize deductions in excess of the increased standard deduction amounts (mortgage interest, limited real estate/income taxes, charitable donations) to enter the excess deductions on this line, as well as also entering the amounts of other tax deductions such as tax-deductible IRA contributions, student loan interest (limited), etc. This step is not required for the majority of the workforce, and primarily is important for higher income taxpayers, those who are significant donors to charities, etc.
Step 4, line C
This line enables a taxpayer to insert an additional amount of federal income tax they wish to have withheld from their paychecks as a “cushion”, to generate a likely refund, or as instructed when Step 2 is completed for multiple jobs. Taxpayers who wish to ensure an annual Form 1040 tax refund, as “forced savings”, may wish to insert an amount on Step 4, line C—-it is essentially an interest free loan to the government, but many taxpayers would rather have too much tax withheld and claim an annual refund, than end up “short” when they file their annual Form 1040 income tax returns.
A previous PayDay by AccuPay included a link to the new IRS Tax Withholding Calculator—-here is a link to this previous PayDay and the Tax Withholding Calculator.
The brand new 2020 W-4 is a radical departure from previous W-4 forms since it no longer includes “exemption/allowances” and it is intended to enable employees to more accurately calculate their withholding than before, in a simpler manner. Our sense is that this new W-4 is an improvement over the previous version, but it will take some time to get used to for accurate reporting.
Employers will also be required to enter more information than simply “married claiming 4” for those taxpayers who choose to complete all 5 “steps” of the new W-4. If you have questions about the new W-4, do not hesitate to contact your payroll professional at AccuPay—-317-885-7600 or payroll@accupay.com.