Just an FYI to all to check your withholding amount for 2020 and make sure you’re meeting safe harbors. The IRS appears to once again have changed their methodology on how employers calculate withholding.
I’m not familiar with exactly what changed, except neither of my paychecks have the withholding allowance printed on them anymore, and colleagues have said their withholding amount decreased as well. If anyone has any more insight into what has happened or why it has happened, please share.
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I can’t provide insight, but recall that my wife got a notice from her employer to re-check her W-4 elections as deduction amounts had been re-calculated. I suspect this has something to do with the Trump tax cuts but it is just a guess.
The insight is simply that the new W4 reflects the changes made on the tax forms themselves. No more withholding allowances for either.
Direct from the source:
I recently looked in to this and found…
(1) Exemptions aren’t a thing anymore – but they still exist (keep reading).
(2) The new 2020 W-4 doesn’t include any reference to exemptions.
(3) The new 2020 W-4 includes a new choice for withholding. Married and Single as before but now there’s a choice for Head of Household.
(4) All new W-4 forms that you submit to your employer must be the new 2020 exemption-less W-4 forms.
(5) Your employer can request a new W-4 from you because of the change, but you aren’t required to provide one if the employer already has a pre-2020 W-4 on file.
(6) If you’re a new hire or you want to adjust your withholding you MUST use the new 2020 W-4.
(7) Your employer will withhold from your paycheck using the new 2020 W-4 if they’ve got it, or they’ll use your old exemptions if you had previously provided them a pre-2020 W-4. In this regard, exemptions still exist.
I used Publication 15-T to figure out how the new W-4 worked as it pertains to employer withholding. (A link to the PDF is below.) Starting on page 5 you’ll see how your employer will use the information you provide on the new 2020 W-4 (or the old pre-2020 W-4) to calculate your withholding. I’ve already estimated my 2020 tax liability and I know how much I need to have withheld from my check to accomplish my goals. Knowing this, I used page 5 of Publication 15-T to reverse-engineer the 2020 W-4 form so I knew what numbers to supply on my new 2020 W-4 to have my taxes withheld exactly consistent with my requirements.
IRS Publication 15-T
My impression of the new 2020 W-4 is that it does an excellent job of withholding the exact right amount of taxes if you fill it out correctly. It also improves the accuracy of your employer’s withholding under a couple of circumstances that the previous W-4 didn’t. Specifically, anyone who’s Head of Household benefits by the change because you don’t have to tamper with exemptions to correct for a lack of Head of Household choice as was necessary with the previous W-4. Secondly, it seems like the new W-4 handles married employees that have both people working so the tax withholding would be correct for the household.
I think this is because the previous form only allowed you to enter exemptions, and each exemption reduced your taxable income by some amount that varied every year ($4300 being the last one). You could not be exact unless you selected the correct number of exemptions AND an exact additional withholding. Now you can just enter any extra income and deductions to arrive at the exact taxable income.
Just food for thought, I’ve claimed 14 on my W-4s for a few years now (no taxes withheld except for bonuses) and filed quarterly estimated payments. It allows me to be more in control of my money and not give the IRS an interest free loan.
That being said, technically any time you owe $1,000 or more in taxes you need to pay it or you may be liable for back interest. It worked great for several years.
Recent Trump tax laws are friendly for middle class and especially people with children and/or a business. I started a new side business in 2019 and overpayed a bit, underanticipating my extra business deductions.
Sounds like the new 2020 W-4 does a decent job of updating things, though many existing unimformed employees will still overpay, at least until they get a new job or their company requests a new W4.
The new 2020 W-4 doesn’t prevent you from doing what you used to do. Instead of exemptions, you’ll put a dollar amount on Line 4(b). What used to be “1” exemption is now simply $4,300 on Line 4(b).
Here’s a quick breakdown…
Checking Box [c] in step 2 on the 2020 W-4 will result in your taxes being deducted as if you are splitting the Standard Deduction with someone else or some other job. (Fewer tax-free dollars – greater withholding.)
Line 3 (Step 3) on the 2020 W-4 will REDUCE your withholding on a dollar-for-dollar basis (per year). It’s for the Child and Dependent Tax Credit so I’d be reluctant to insert a number here that demonstrably fictional.
Line 4[a] on the 2020 W-4 will INCREASE your withholding based on your marginal tax bracket. If you’re in the 22% bracket, each $1,000 on this line will result in $220.00 additional withholding (per year). I’m certain that nobody cares if you insert a fictional number here because it simply creates a refund.
Line 4[b] on the 2020 W-4 will DECREASE your withholding based on your marginal tax bracket. If you’re in the 22% bracket, each $1,000 on this line will result in $220.00 less withholding (per year). Inserting a fictional number here will cause you to owe money. Since the amount on this line is for deductions you “expect to claim” there shouldn’t be any liability if your crystal ball was hazy – except if you end up owing the IRS more than $1,000. “I expected to fund my IRA but I never did” seems like it would be a reasonable excuse to use up to the $1,000 penalty level.
Line 4[c] on the 2020 W-4 will INCREASE your withholding on a dollar-for-dollar basis (per year). I’m certain that nobody cares if you insert a fictional number here because it simply creates a refund.