Ever since the passage of the Tax Cuts and Jobs Act (TCJA) in late 2017, there has been much discussion about the amount of tax withheld from wages. Although most provisions of the new law took effect in January of 2018, the IRS didn’t release updated withholding tables until February of 2018. The new tables were designed to withhold tax amounts appropriate under the new law, but most people didn’t bother to fill out a new W-4 with the new law in mind.
The TCJA lowered tax rates for most taxpayers, and therefore the tax withholding tables caused less tax to be withheld from most employees. For many, this meant smaller refunds when they filed their 2018 tax returns earlier this year. For some, this was an unpleasant shock even though they had actually been taking more money home with each paycheck.
An employer withholds income tax from an employee according to information the employee provides on Form W-4. If the information provided is inaccurate, the amount of tax withheld may not be sufficient to satisfy the employee’s tax liability.
The problem is that filling out a Form W-4 might not be that easy. If a taxpayer is single, only has one job, doesn’t have any other forms of income, and doesn’t itemize his deductions, then the Form W-4 is fairly straightforward and the tax withholding should be on target. The problem is that most people have a more complicated tax situation. Taxpayers with more than one job, a working spouse, children, and income from investments have a much more difficult time using Form W-4 to accurately calculate their withholding needs.
Yes, the IRS did originally create a new Form W-4 that tried to encompass a taxpayer’s entire tax return. The problem was that it was difficult for most people to fill out. Also, it required the disclosure of information an employee might not want to share with his employer. For instance, many employees might not want their employers to know how much their spouse earns or how much (or little!) they earn in interest and dividend income. After many comments from both taxpayers and CPAs, the new, complicated W-4 was scrapped and the form used for 2018 looked much like it did in prior years. The problem with this one was that it still had information about allowances, even though the TCJA did away with personal exemptions.
The IRS recently issued a draft form of the W-4 they expect to publish for 2020. It is in draft form because they are seeking comments and feedback about the form and its instructions. The form is relatively simple, with only a few lines to complete. It attempts to solve the issue of a two-income household by including a chart that lists annual wages for the highest paying job down one side and for the lower paying job across the top. Find the intersection of the two incomes, and the amount listed will be an “additional amount” of withholding that an employee should request based upon the fact that the spouse also works. The draft form also has a line where an employee could list “other income” for which they would like to have tax withheld. For instance, if you know you will have significant dividend income, you could include it on the W-4 and the tax withheld from your wages would be increased. This brings us back to the problem of disclosing information to your employer that you might not want to share.
The IRS recognizes that many taxpayers may want to keep their income and deduction details to themselves. There is a fairly robust calculator tool on the IRS website. This tool allows taxpayers to do a detailed review of their income and tax withholding. If a tax deficiency is calculated, the employee can simply turn in a new Form W-4 that lists the appropriate “additional amount you want withheld from each pay period” without disclosing anything about how the number was calculated.
If you take the time to look up all the information required, the calculator can do a fairly accurate job. Or, if you are happy with the amount of tax due or refunded on your 2018 return, and your income is about the same for 2019 and 2020, you won’t need to do anything. Of course, many taxpayers with complicated tax returns should consult a professional. The tax law is complicated, and no two tax situations are identical. A thorough review of your prior tax returns coupled with a complete tax projection for the current year is the best way to avoid all surprises on April 15th.
Associate Partner
Julie has over 20 years of experience in public and private accounting, representing varied clientele including the medical, legal, and real estate industries and trusts.
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