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How Much Power Does Form W-4 Have Over Your Tax Bill?

Most employees complete Form W-4, but they never realize how much power it has over their tax bill come tax preparation time.

A Form W-4, formerly known as “Employee’s Withholding Allowance Certificate”, is filled out by employees to tell employers how much tax to withhold from each paycheck. The employer uses the W-4 to calculate certain payroll taxes and remits the taxes to the IRS on the employee’s behalf. You’ll fill out a W-4 when you start a new job, but you can change your W-4 any time.

For the year 2020 the IRS has redesigned the W-4 form and is now titled “Employee’s Withholding Certificate”. The new form reduces complexity, increases transparency and accuracy of the withholdings, balances privacy for employees while minimizing the burden for employers and payroll processors. It incorporates the Tax Cuts and Jobs Act better by allowing employees to more accurately estimate the amount of tax they ask their employers to withhold from their paychecks beginning in 2020. Unlike the old form, the new form no longer uses allowances. With the old form, the value of the withholding allowances was tied to the amount of personal exemptions. Due to the changes in tax law, you can no longer claim personal or dependency exemptions.

You don’t have to fill out the new form if you already have a W-4 on file with your employer. But if you change jobs in 2020 or want to adjust your withholdings at your existing job, you’ll likely need to fill out the new W-4. Either way, it’s a great habit to review your withholdings.

The questions that always come up are:

  • When should I increase my withholding? If you had a huge tax bill last year and don’t want another, you can use Form W-4 to increase your withholding. That will help you owe less (or nothing) this year. Other reasons are: If you have more than one job at a time or you and your spouse both have jobs, or you have income from sources other than jobs or self-employment that is not subject to withholding. If you do not make adjustments to your withholding for these situations, you will very likely owe additional tax when filing your tax return, and you may owe penalties. You can also pay quarterly estimated taxes instead of having extra withholding if you have income from sources other than from jobs.
  • When should I decrease my withholding? If you received a huge refund last year, you gave the government a free loan and could be living on less of your paycheck all year long. Other reasons to decrease your withholdings are: If you are eligible for income tax credits, such as the child tax credit or credit for other dependents or are eligible for deductions other than the basic standard deduction, such as itemized deductions, or IRA contributions.
  • Can I claim Exemption from withholding? You can claim exemption from withholding for the year 2020 if you meet the following conditions: You had no federal income tax liability in 2019 and expect to have no federal income tax liability in 2020. If you claim exemption, no income tax will be withheld from your paycheck.

All new employees with the first paycheck in 2020 must use the redesigned form. Similarly, any other employee who wishes to adjust their withholding must use the redesigned form. Don’t overlook your withholdings. They are part of your tax planning strategy. It’s Not How Much You Make… It’s How Much You KEEP! $$$

Written by Esther Phahla

Esther Phahla is a Certified Public Accountant and Certified Tax Coach in Temecula. She also holds a Masters of Science in Taxation. She is the Best Selling Co-Author of a Tax Planning book “Why Didn’t My CPA Tell Me That”. She can be reached at (951) 514-2652.

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