This time last year many Americans received an unwelcome surprise when they prepared their tax returns. Due to new lower marginal tax rates that were part of the Tax Cuts and Jobs Act and updated IRS withholding tables, some people ended up getting smaller tax refunds than they were expecting — or even worse, having to pay additional income tax.
To help remedy the problem, the IRS introduced a new W-4 form this year. Titled the Employee’s Withholding Certificate, this is the form used by taxpayers to determine how much money should be withheld from their pay each pay period to cover federal income taxes. The adjustments represent the biggest changes to this form in decades.
No More Allowances
The new W-4 form eliminates allowances, which were key to the old form. These allowances were based on personal exemptions — or in other words, how much income was exempt from income tax based on the number of dependents in a taxpayer’s household.
The tax reform act eliminated personal exemptions so the IRS changed the W-4 form to reflect this. The new form collects information about all of your household income instead of personal exemptions, as well as information about your dependents. Based on this, you can then calculate how much money should be withheld from your gross pay to cover taxes.
Five New Sections
There are five sections in the new W-4 form. The first section is simply personal information — your name, address, Social Security number and filing status.
The second section is where you’ll provide detailed information about your household income. You should complete this section if you earn income from more than one job or if both you and your spouse work and you will file your tax return jointly. Determining the correct amount of withholding depends on accounting for all of your household income.
Form W-4 includes a Multiple Jobs Worksheet you can use to calculate your withholding, or you can use the IRS’s online calculator at www.IRS.gov/W4App. If both you and your spouse work one job and the pay is roughly the same, you can check a box indicating this. You should check this box on both spouse’s W-4 form but only fill out sections three and four on one of them.
Claiming Dependents and Making Adjustments
Section three is where you will claim dependents — these are generally considered to be children living with you for more than half the year who are under the age of 17. Other relatives living with you may also qualify as dependents in certain circumstances.
You will multiply the number of qualifying child dependents in your household by $2,000 and the number of other dependents living in your household by $500, add these totals and include this amount in section three.
In section four, you’ll make any necessary adjustments for other income from which taxes aren’t withheld, such as dividends, interest and retirement account withdrawals. You can also make adjustments if you expect to claim deductions other than the standard deduction and want to reduce your withholding to reflect this (a Deductions Worksheet can help you figure this). There’s also a line where you can have a set amount of extra money withheld from your pay just to be on the safe side or to help ensure that you get a refund, or a larger refund than you would otherwise.
The final section is where you will sign and date the form.
Do You Need to Fill Out Form W-4?
Unless you’re starting a new job, you probably don’t have to fill out Form W-4. However, if your withholding last year was inaccurate — for example, you received a very large refund or ended up having to pay additional tax — then you can correct your withholding by filling out the form. This should result in more accurate withholding throughout the rest of this year.
It may also be a good idea to fill out Form W-4 if you’ve had a major life event recently, such as a marriage, divorce or birth of a child.
Be sure to speak with your tax advisor if you have more questions about your income tax withholding or need help in filling out Form W-4.