As you know, this year we welcomed a new Form W-4 with the new tax law. While the IRS is not requiring employers to obtain new W-4s from employees, it’s definitely something employers need to be aware of. Your W-4 is what determines how much federal tax is withheld – which makes it a very important document. If not enough taxes are withheld, the taxpayer will owe. If too much tax is taken out, the taxpayer will get a refund but will have less take home money on their paychecks throughout the year.
Filling out the original W-4 was already a problem for taxpayers. This new form adds to the confusion when it comes to withholding. As a tax professional and trusted advisor, it’s important to keep clients educated and informed so there are no surprises at tax time. Are you reaching out to your business clients? Are you coaching your individual clients? Here are some things to discuss with them.
Goodbye Personal Exemptions
The new tax law eliminated personal exemptions – which means filling out Form W-4 is no longer putting 1 for you, 1 for spouse, and 1 for dependents and calling it a day. There’s a lot more to it!
How to Perform a Paycheck Checkup
Because of the drastic changes, it’s going to be important for taxpayers to review their withholding – especially for taxpayers who itemize deductions, own a home, are self-employed or are in any other situation that complicates their tax return.
Employers should educate employees on how to perform a paycheck checkup and encourage them to use the new withholding calculator.
Special situations include:
- Filers with multiple jobs or working spouses need to read Two-Earners Multiple Jobs Worksheet
- Non-Wage Income –Interest Dividends, K-1 may require estimated payments
- Self-Employed person should read publication 505
- Non-Resident Aliens see Notice 1392, Supplemental Form W-4 Instructions for Non-Resident Aliens
Child Tax Credit
The recent changes to the Child Tax Credit will affect most parents and guardians. For starters, the credit has been doubled from $1,000 to $2,000 per qualifying child. It’s important to note that this is a credit and not a tax deduction. That means taxpayers get the reduction directly off their tax bill rather than having the money deducted from their taxable income.
There’s also a $500 “family credit” for other dependents.
Other Credits/Converting credits
In addition to filling out the Child Tax Credit section, there’s a credit conversion worksheet to fill out for the following credits:
- Lifetime Learning (MAGI must be less than $57,000; $114,000 if married filing jointly)
- American Opportunity Tax Credit
- Retirement Savings Contribution Credit (MAGI must be less than $31,500 ($63,000 if married filing jointly; $47,250 if head of household)
- Adoption Credit (MAGI must be less than $247,140)
- Earned Income Credit – eligible if:
- Three or more children lived with you and you earned less than $49,194 ($54,884 if married filing jointly),
- Two children lived with you and you earned less than $45,802 ($51,492 if married filing jointly),
- One child lived with you and you earned less than $40,320 ($46,010 if married filing jointly), or
- A child didn’t live with you and you earned less than $15,270 ($20,950 if married filing jointly).
Itemized Deductions
Some itemized deductions have been eliminated, such as Unreimbursed Employee Business Expenses. The biggest change to itemized deductions will be due to the fact that the standard deduction has been nearly doubled. Taxpayers should use the Deductions, Adjustments and Additional Income Worksheet of the new W4 to determine if itemized deductions will affect them.
Nonwage Income
There are also several types of “nonwage income” that should be reviewed. Nonwage income includes:
- Interest
- Dividends
- K-1
- Self-Employment
- Gambling Winnings
- Capital Gains-Stocks, Property Sales
- Retirement Distributions -including IRA’s
When to Change Withholding Allowances
It’s always a good idea to remind clients of the instances where withholding allowances should be changed.
- Lifestyle changes (marriage, children, divorce etc.)
- Wage or income changes
- A change in the amount of taxable income not subject to withholding
- A change in adjustments to income (capital gains, self-employment income, etc.)
- A change in the amount of itemized deductions (medical expenses, taxes, gifts to charity, etc)
This year (and beyond), communicating with clients about the changes to the law and how they will affect their specific tax situation will be crucial. Encourage clients to make tax planning appointments with you to ensure they make the right moves.
Want to know more details about the new W-4 Form? Stay tuned! We’ll be hosting a webinar that reviews the form line by line in the next few weeks.