By: Kelly Ha
Remember that government form called a W-4? It's usually part of a pile of other forms when starting a new job, and determines the amount of income taxes that your employer will withhold from your paycheck. This week, the IRS issued a draft of the new Form W-4, which reflects changes under the Tax Cuts and Jobs Act (TCJA). Here's what you need to know...
A Form W-4 comes with a series of worksheets that help you calculate the appropriate number of allowances to claim. You can take a closer look at the full current W-4 form and worksheets here. The revised Form W-4 doesn't take effect until 2020.
How often should you reevaluate your W-4?
There really is no right or wrong answer to this question. A W-4 should be completed when starting a new job and can be changed anytime. After the initial completion of the form, any big changes occurring throughout the year, such as getting married, divorced, having children, getting a new job, etc., may require you to prepare a new form W-4. These life events can have a big impact on your taxes and it’s important to review your W-4 to determine whether you are withholding an appropriate amount of taxes.
TCJA: How does it affect you?
One of the biggest and most recent examples of the importance of updating your form W-4 is the impact the new tax act had on everyone’s 2018 tax returns. The new tax laws reduced income tax rates, which prompted the IRS to publish new withholding tables.
Some workers saw an increase in their take-home pay after employers implemented the new IRS income tax withholding tables. As a result (depending on the taxpayer’s personal situation), some people saw smaller-than-expected refunds. On the other hand, others were surprised to discover their tax burden increased because the new law eliminated some popular deductions.
A common misconception of taxpayers receiving smaller refunds was that their tax liability increased, when in reality, the revised lower tables actually resulted in larger net paychecks throughout the year, but a smaller refund when it came time to file their tax returns.
It is recommended that employees perform a tax withholding review to ensure that an appropriate amount of taxes are being withheld.
How do you perform a tax withholding review?
There are several online withholding calculators that can be used to perform a quick paycheck withholding test. The IRS advises taxpayers to take advantage of the withholding calculator on its website to do a payroll check-up. However, if you use any other calculators, do not provide your name, social security number or any other personally identifiable information.
When using a withholding calculator, the following may be helpful:
- Gather your most recent pay stub.
- Have a copy of your most recent income tax return handy so you can determine if you have any additional income or increased deductions that may affect this calculation.
- Try to answer the questions as accurately as possible.
Of course, if you need assistance in reviewing your W-4, The Tax Warriors® at Drucker & Scaccetti are always available to assist. Performing your review sooner rather than later is always a preferred choice.