On February 28, the Internal Revenue Service (IRS) released a revised Form W-4, as well as an updated online Withholding Calculator, in response to the passage of the Tax Cuts & Jobs Act in late December.
The Tax Cuts and Jobs Act made significant changes to the tax law, including increasing the standard deduction, removing personal exemptions, increasing the child tax credit, limiting or discontinuing certain deductions, and changing the tax rates and brackets.
WHO IS AFFECTED?
In January, the IRS released new withholding tables as a first step to reflect the tax law changes.
These tables were designed to produce correct withholdings for those with “simple tax situations,” such as singles, married couples with one income, and those with no dependents, itemized deductions, tax credits and/or adjustments to income. These taxpayers may not have to adjust their W-4.
Individuals with more “complex tax situations,” however, may need to revise their W-4 in light of the changes. Complex situations include two-income families, people who work two or more jobs or only a portion of the year, people who claim Child Tax Credits, people who itemize deductions, and people with high incomes.
As a result, the IRS is urging all taxpayers to perform a Paycheck Checkup through its new calculator to ensure they have the right amount of tax withheld from their paychecks.
USING THE WITHHOLDING CALCULATOR
The Withholding Calculator asks taxpayers to estimate their 2018 income and other items that affect their taxes, including the number of children claimed for the Child Tax Credit, Earned Income Tax Credit, and other items. The Calculator dos not request personally-identifiable information, such as name, social security number, address or bank account numbers. Similarly, the IRS does not save or record the information entered.
The IRS suggests taxpayers gather the following before using the calculator:
- The most recent paystub reflecting 2018 Year-to-Date Federal withholding tax
- A copy of the 2017 tax return is preferred. If 2017 is not complete, taxpayers can use 2016. Information on the return will help estimate income for 2018.
If personal circumstances change during the year, taxpayers are encouraged to revisit the calculator to ensure their withholdings are correct.
IMPORTANT NOTE: This Withholding Calculator works for most taxpayers. People with more complex tax situations should use the instructions in Publication 505, Tax Withholding and Estimated Tax, expected to be updated in early spring. This includes taxpayers who owe self-employment tax, alternative minimum tax, the tax on unearned income of dependents or certain other taxes, and people with long-term capital gains or qualified dividends.
WHAT’S NEW ON FORM W-4
The new Form W-4 is four pages, compared with the two pages of previous years. In addition to the actual Withholding Certificate portion, the form now includes three additional worksheets: a Personal Allowances Worksheet, a Deductions, Adjustments & Additional Income Worksheet, and a Two-Earners/Multiple Jobs Worksheet. There is no need to complete the worksheets if the calculator is used.
A new W-4 is not required for every employee, only for those with changes or who remain exempt.