The idea of cranking out yet another form after filing your income tax return sounds as soul-crushing as, oh, maybe clearing out all those boxes filled with who knows what from the basement.
Take time to fill out a new W-4 for 2020? Sure, let me do the laundry first.
One reason you might be looking at a much smaller tax refund – or owe far more money than you’d imagine – is that you didn’t earmark enough cash out of each paycheck toward your taxes. If you need to change your withholding, you need to complete a new W-4 form.
The Tax Cuts and Jobs Act of 2017 put a slew of new tax rules into place beginning in 2018 and altered the tax picture for many families. The tax withholding tables that went into place in early 2018 put more money in paychecks throughout the year by reflecting the new lower tax rates. But the withholding tables alone do not reflect an individual’s or a couple’s specific tax liabilities.
Families with two wage earners might have problems if they did not change their W-4 to withhold more taxes, said James O’Rilley, CPA and tax director for Doeren Mayhew in Troy, Mich.
O’Rilley explained that the withholding tables are based on an assumption that each spouse is the only wage earner. If a married couple files a joint return, their tax rate could be higher than a single person’s because their tax is calculated on their combined income.
A newly created W-4 takes into account whether you work two or three jobs or your spouse has a job and suggests ways to take into account self-employment income.
Some may need to take time to fill out a new W-4 to withhold more in taxes than the withholding tables outline or risk owing more than they realize. You fill out the W-4, then must give it to your employer to change the withholding for taxes from your paycheck.
O’Rilley said many taxpayers don’t realize they’re taking the new higher standard deduction – $24,400 for married couples filing a joint return – and not itemizing deductions any more.
The old W-4 was difficult for those who worked two or three jobs, instead of just one, among other factors.
Here’s what you need to do if you file a new W-4:
Find out online if you’re withholding enough
A new withholding form exists for 2020. Taxpayers should go online and use a Tax Withholding Estimator at www.irs.gov/W4App to work through some of the numbers. Or talk with a tax professional for help.
Remember, you’re not required to fill out a new Form W-4 if you work at the same old job. If you do change jobs, you will deal with a new form.
Taxpayers need to be aware their withholdings may not be enough and they may want to file a new W-4 to make necessary changes.
You may need to use the tax withholding estimator if you expect to work only part of the year, have dividend or capital gain income or are subject to additional taxes, such as the Medicare tax.
“Monitor your taxes when you file your tax return this year,” said Mark Steber, chief tax officer at Jackson Hewitt.
If you don’t like the result – your tax refund is too small or you owe too much money – adjust your tax withholding via W-4 for 2020 tax returns.
“This year, withholding tables and forms attempt to be more closely tied to the withholding needs of the individual,” Steber said.
The new form offers a line to reflect how many children you have in your family that are under the age 17 and how many dependents may be older. The age breakdown is important because the dollar amount for the tax credits related to children and dependents will vary based on age under the latest tax revisions that went into place beginning on 2018 tax returns.
Taxpayers who follow the new W-4 form and instructions should be able to cover their taxes due. Steber said the new format intentionally doesn’t withhold large amounts of money to engineer sizable tax refunds. There are ways around that one.
You can withhold more from each paycheck
Typically, financial planners suggest that it’s better to get your money upfront and not use your income tax withholding as some sort of forced savings account.
But many people bank on big refunds every year if they’re saving for a vacation or home improvements.
It’s always possible to have extra dollars withheld to ensure a large refund, Steber said. You can submit another W-4 form in a given year to reach the amount of withholding you want.
Look for a line for “extra withholding” on the new W-4 if you want more money withheld from each paycheck. That’s under Step 4, Line C.
A quick trick to update withholdings is to divide what you owe in income taxes by the number of remaining paydays in the year and enter this amount on line 4C of the W-4 form, Steber said.
For example, if a taxpayer owed $3,000 and they have 22 paydays left this year, they should divide $3,000 by the 22 and request to have an additional $136.36 each payday.
“This won’t guarantee a refund next year, but if there is a balance due, it will be small and not subject to an under-withholding penalty,” he said.
(Article written by Susan Tompor)