Monday, December 9, 2019

THE 2020 FORM W-4

The IRS has released the final version of the 2020 Form W-4 – Employee’s Withholding Certificate, to, hopefully, properly reflect the changes enacted by the GOP Tax Act (i.e. the Tax Cuts and Jobs Act).

The major change to this form is that the concept of “withholding exemptions” no longer exists.  And, of course, it is now a full page instead of just coupon-sized.

Every single employed taxpayer will need to file a 2020 Form W-4 with their employer.

The form at one point is concerned that “more tax than necessary may be withheld”.  While for the financially prudent taxpayer owing Sam $1,000 or less at tax time is actually beneficial – excess withholding is an interest-free loan to the government, and owing a small amount means that you had full use of your money during the year – most taxpayers are more concerned with having less tax than necessary withheld, and would prefer a cushion to avoid a balance due on their 1040.  For peace of mind if nothing else being over-withheld is better than being under-withheld.  And many taxpayers have historically used a substantial tax refund as a form of “forced savings”. 

In Step 1 you enter your name, address, Social Security number, and filing status.  There is no long the option to claim “Married, but withhold at higher Single rate”.  And the new W-4 includes the Head of Household status option, which was not on the old W-4.  

As a point of information - claim “Head of Household” status on your W-4 only if you file your Form 1040 each year as a Head of Household.  I learned very early in my career that while some people may consider themselves a “head of household”, the IRS does not.  For IRS purposes a “household” does not consist of one person.  There are very strict and specific rules for this filing status.  Perhaps the best explanation of what the IRS considers a true “Head of Household” is a single parent with a dependent child.

Step 2 of the new W-2 finally recognizes the possibility that the job for which the W-4 is being submitted may not be the taxpayer’s only source of income, especially if he or she is married.  If you have more than one job, or you are married and your spouse also has a job, check the box at item (c) in Step 2.

The complexity of the new W-4 lies in the “Multiple Jobs Worksheet” on Page 3 of the W-4 packet.  Do not use this worksheet – it will very likely have your head spinning.

If you are using withholding as savings, do not make any entries in Step 3 for any dependents you are claiming.  If this is not an issue, as a safety matter claim only half the number of actual dependents – if you have two children under age 17 claim only $2,000 here for one dependent; if you have two children age 17 or older claim only $500.  For a married couple only the spouse with the higher W-2 income should claim any amount for dependents.  If you are married and both spouses work and one or both of the spouses has a second job neither of you should claim anything for dependents in Step 3.

Most definitely include any taxable non-W-2 income on line 4(a) in Step 4.  This includes interest and dividends, capital gains, K-1 pass-through income, net self-employment income from Schedule C or C-EZ (after any adjustments to income for health insurance and pension contributions and the Section 199a QBI deduction) and any amounts that would be included on Line 8 of Form 1040 Schedule 1.  You can use your 2019, or in January the 2018, tax return as a guide for completing this Section.  If you are receiving IRA. Pension or Social Security income you do not have to include this income here.  You can request a specific percentage be withheld for federal income tax for these sources – and you should have federal income tax withheld from each source. 

It is my recommendation that you do not include anything for “Deductions” on line 4(b) of Section 4 – even if you will be able to itemize or are entitled to any additional deductions.  Here is another opportunity to provide a cushion.

As for entering any “Extra withholding” on line 4(c) – on the initial 2020 W-4 filing you can leave this blank.  If after a month of withholding under the new W-2 you think you may need more withheld you can submit another W-4 with the same entries you made on the original but adding an additional amount on 4(c).  After preparing your 2019 return you may want to submit a revised W-4.

It is important that you keep a copy of every 2020 Form W-4 you give to an employer for your records.

Looking at the form there is no place on the form for an employee to indicate “EXEMPT”, as there was on the old W-4.  Dependent children with summer and after-school jobs do not need to have any income tax withheld.  However, the instructions tell you to write "'EXEMPT' on Form W-4 in the space below Step 4(c)".  Do not enter anything in Steps 2 and 3 or elsewhere in Step 4. 

While the 2020 Form W-4 is more involved, I believe it is actually “more better” than the old method of calculating withholding, especially under the GOP Tax Act.


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