As promised, the IRS announced on February 28 that it has delivered a new version of Form W-4 for withholding tax from paychecks, reflecting changes in the new Tax Cuts and Jobs Act (TCJA).
The agency has also updated the calculator used to calculate withholding (IR-2018-36, 2/28/18). The “fixes” come on the heels of revised withholding tables issued earlier this year.
With these new tools at their disposal, your clients may avoid withholding too much or too little tax for the 2018 tax year.
“Following the major changes in the tax law, the IRS encourages employees to check their paychecks to help ensure they’re having the right amount of tax withheld for their personal situation,” said Acting IRS Commissioner David Kautter, who has temporarily stepped in to replace John Koskinen. In February, President Trump nominated Beverly Hills attorney Charles Rettig to lead the agency.
The TCJA includes a massive overhaul of the tax code for individuals, including cutting tax rates, doubling the standard deduction, repealing or modifying certain itemized deductions, eliminating personal exemptions and incorporating various other provisions that may have an impact on withholding. It’s taken the IRS a couple of months to sort through all the changes.
As a first a step, the IRS released new withholding tables in January. These tables are designed to produce the correct amount of tax withholding in simplified tax situations. For instance, a single filer with no dependents who claimed the standard deduction in the past might not have to do anything further. But some clients may have to tweak their W-4s on file to avoid over- or under-withholding.
Specifically, the IRS says the following groups should perform a withholding check-up now that the Form W-4 has been revised:
- Two-income families.
- People with two or more jobs at the same time or who only work for part of the year.
- People with children who claim credits such as the Child Tax Credit (CTC).
- People who itemized deductions in 2017.
- People with high incomes and more complex tax returns.
The easiest way for clients to manage the situation is to use the updated withholding calculator at www.irs.gov/individuals/irs-withholding-calculator. It should only take a few minutes.
To ensure accuracy, the IRS has provided the following seven tips in its new press release:
- Gather your most recent pay stub from work. Check to make sure it reflects the amount of federal income tax that you have had withheld so far in 2018.
- Keep a copy of your 2017 tax return handy. Information on that return can help you estimate income and other items for 2018. However, note that the TCJA made significant changes to itemized deductions.
- Be aware that the withholding calculator results are only as accurate as the information entered. If your circumstances change during the year, do another calculation to make sure your withholding is still correct.
- The withholding calculator doesn’t request personal identification information such as your name, Social Security number, address or bank account numbers. Nor does the IRS save or record the information entered on the calculator. Watch out for tax scams relating to these matters.
- Use the results from the withholding calculator to determine if you should complete a new Form W-4 and, if so, what information to put on it. You don’t have to complete the worksheets that accompany Form W-4 if the calculator is used.
- Generally, the fewer withholding allowances you enter on the Form W-4, the higher your tax withholding will be. Entering “0” or “1” on Line 5 of the W-4 means more tax will be withheld. Entering a bigger number means less tax withholding, resulting in a smaller tax refund or a potential tax bill or penalty.
- If you complete a new Form W-4, submit it to your employer as soon as possible. With withholding occurring throughout the year, it’s better to take this step early on. Pass this valuable information along to your clients. If required, you can provide the necessary guidance.
About Ken Berry
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a wide variety of newsletters, magazines, and other periodicals.