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IRS Reveals Proposed 2020 Form W-4

IRS Reveals Proposed 2020 Form W-4

On May 31, 2019, the Internal Revenue Service (IRS) revealed a draft of Form W-4 that is expected to be released in 2020.  For those who aren’t familiar, the Form W-4, Employee’s Withholding Allowance Certificate, is used by individuals to calculate or adjust the amount of federal withholding that an employer withholds on their paychecks.  If you receive a W-2 at the end of the year, chances are you filed this form during your hiring process.  For many individuals, the goal of withholding is to not owe the IRS any money when filing their tax return.  Ideally, an individual would prefer the exact amount of tax withheld to avoid any additional tax liability on April 15th.  Since this rarely occurs, taxpayers need to take a closer look at these changes.

The Current Form W-4

The current format of Form W-4 is based on “allowances”. Allowances are reductions in the amount of withholding an employer will remit to the IRS on behalf of an employee.   The greater the number of allowances you report on your W-4, the less your employer will withhold from your paycheck for federal tax purposes.  The current form has a worksheet for the number of allowances to claim. Items that affect the number of allowances include filing status, number of dependents, itemized versus standard deduction, and child tax credits.  Personal exemptions are no longer considered when figuring allowances due to their elimination with respect to  the Tax Cuts and Jobs Act.

Employees who have submitted Form W-4 in a tax year prior to 2020 are not required to complete an updated form.  Employers will continue to withhold based on  information submitted on the existing Form W-4.  Prospectively, employers will use the same set of withholding tables for both sets of forms.  Additional IRS guidance will be provided in the future for payroll calculations.

The Proposed 2020 Form W-4

IRS Commissioner Chuck Rettig stated, “The primary goals of the new design are to provide simplicity, accuracy and privacy for employees while minimizing burden for employers and payroll processors.” So, does this new form accomplish this?  When comparing the draft 2020 Form W-4 to the current IRS form, two changes immediately stand out: the proposed form appears significantly longer, and allowances have been removed.  The proposed Form W-4 is designed more like a 1040 projection than a simplified withholding form. 

The form includes four steps: personal Information, tracking for multiple jobs, dependents claimed , and other adjustments. The first section asks for your name, address, social security number and anticipated filing status. Steps two through four may then be skipped if they’re not applicable. If applicable, step two requires an individual to account for all jobs worked between taxpayer and spouse which can lead to additional calculations through a worksheet or use of a calculator on the IRS website.  A box was added for taxpayers with spouses who each have one job that when checked, will calculate your withholding.

The “Claim Dependents” step identifies how many qualified or other dependents you will have and the dollar amount you will be able to deduct for those dependents.  The larger the amount you can claim, the less withholding will be required.

“Other Adjustments” is where we see the biggest changes.  In the current version of the W-4, we are limited to choosing allowances that dictate the amount of withholding from our paychecks.  In the proposed Form W-4, you calculate other income and deductions and enter a total dollar amount. For “other income”, you can choose to withhold based on income outside of your job, such as interest, dividends, and retirement income.  For “deductions” you can calculate an amount you would want to reduce your withholding by that would be outside the normal standard deduction.  These two changes will require employees to be more careful when completing these forms and to make changes each year as circumstances change.  Individuals will need to be more informed and have additional tax-planning conversations with their accountants. 

Lastly, you may enter an additional amount that you would like to withhold from each pay period or request an exemption from withholding.

Although these changes are not yet finalized, they do provide us with direction on how the IRS wants to improve the withholding process.

For more information regarding the proposed Form W-4 and a draft of the 2020 W-4, visit https://www.irs.gov/newsroom/irs-treasury-unveil-proposed-w-4-design-for-2020.

For more information, please contact a member of the Herbein tax team, or email us at info@herbein.com.

Article prepared by Michael Koller.