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.

TTFN

ADVICE FOR A NEW GRADUATE STARTING OUT IN HIS/HER FIRST FULL-TIME JOB

Dear Graduate:

1.  Claim Single-1, or Single-0, on your Form W-4 for federal and state withholding.  Do NOT claim more than 1 exemption.

2.  Participate in your employer’s 401(k) or 403(b) plan.  If cash-flow permits, contribute the maximum, which for 2014 is $17,500.  If you cannot contribute the maximum try to contribute at least enough to qualify for the maximum amount of any employer matching contribution.  If your employer offers a ROTH 401(k) or 403(b) option choose this option.  As an alternative, if you are contributing the maximum put 50% in a “traditional” account and 50% in a ROTH account.

3.  If you contribute toward the cost of employer-paid group health insurance premiums via payroll deduction, and you are offered an option, elect to have your contributions be treated as “pre-tax”.

4.  Participate in your employer’s medical expense Flexible Spending Account (FSA).  Be conservative and start with $1,000.  You can increase your contribution in subsequent years once you get a handle on your annual out-of-pocket medical expenses.

5.   If you have any cash from graduation gifts left over open a ROTH IRA account and use this money to fund your 2014 contribution.  The maximum you can contribute to an IRA, “traditional” and ROTH combined, for 2014 is $5,500.

6.  Take an empty coffee can, or other form of “piggy bank”, and put it in your bedroom.  Each week put $10, $20, or $50 in this “bank” (if you choose $20, but $20 in each week).  On January 2nd of 2015 take the money that has accumulated in this “bank” and contribute it to your ROTH IRA for tax year 2015.  Continue this practice for 2015 and subsequent years.  

TTFN

A TIMELY PRE-SUMMER TIP

Now is a good time to refer you to a TWTP post from last year titled - GETTING READY FOR SUMMER – FILLING OUT FORM W-4 FOR A SUMMER JOB.

As you read the post substitute 2014 for 2013, and 2013 for 2014.  For 2014 the Standard Deduction for a dependent is the greater of $1,000 or the dependent's earned income plus $350, not to exceed $6,200 (plus $1,550 if blind).  And the maximum IRA contribution remains at $5,500.

A recent IRS Tax Tip release (“Information for Students Who Take a Summer Job”) provided a good reminder for dependents who will be working as waitpersons or bus persons –

“Keep in mind that all tip income is taxable. If you get tips, you must keep a daily log so you can report them. You must report $20 or more in cash tips in any one month to your employer. And you must report all of your yearly tips on your tax return.”

TTFN

GETTING READY FOR SUMMER – FILLING OUT FORM W-4 FOR A SUMMER JOB

Do you have a teen-age dependent that will soon be looking for a summer job?

Frequently, unless you prepare your child’s tax return yourself, the cost of preparing a short form for a dependent child with an a summer job, solely for the purpose of getting a refund of the federal and state income tax withheld, is more than the amount of the refund.

Before starting his/her job your son/daughter will be given a Form W-4 to fill out.  Line 7 of the W-4 allows an employee to claim exemption from federal and state income tax withholding, if he/she had no income tax liability for 2012 and does not anticipate earning enough to pay income tax for 2013, by writing the word “EXEMPT” in the box indicated.

Writing “EXEMPT” on the form means that the employer will withhold only FICA (Social Security and Medicare) and any required state unemployment and/or disability taxes from the student’s wages.

For 2013, the federal standard deduction for a dependent with a W-2 is the greater of $1,000 or the sum of $350 and the dependent's earned income, not to exceed $6,100 (plus $1,450 if age 65 or blind). The state amount varies, and may be more of less than $6,100.

If you do not anticipate that your son/daughter will earn more than $6,100 during 2013, including up to $350 in interest, dividends and capital gains, have him/her claim “EXEMPT” on his/her Form W-4. This way he/she will not have to file a federal or state income tax return simply to get a refund of the income tax withheld.

 

If your son/daughter has already filled out a Form W-4 for his summer employer, but has not begun work yet, have him/her fill out a new one claimint EXEMPT to give to the employer before starting work.

Of course, on the other hand, and if you will be preparing your son/daughters simple tax returns yourself, you can have him/her use unnecessary federal and state income tax withholding as a form of “forced savings”, so he/she does not urinate away all of his/her summer earnings.

And while we are talking about summer jobs, If your son or daughter has one you should consider opening up a Roth IRA account for him or her.

You can contribute 100% of your child’s earnings to the account, up to a maximum of $5,500.  If your son earns $2,400 this summer you can contribute $2,400 to a Roth IRA for him. If he earns $6,000 you can contribute $5,500.

There is nothing in the tax code that says that the money deposited in an IRA for your son or daughter has to come from the child’s funds.

There is no tax deduction for contributing to a Roth IRA, but most teenagers don’t need the deduction. Qualified distributions from a Roth will be exempt from federal, and probably state, income tax (assuming, of course, that the idiots in Congress don’t change the law in the future).

You can use a Roth IRA to encourage your children to work or to save.  If your son earns $5,000 in a part-time job, open a Roth IRA for him.  Or, if your daughter agrees to put $2,500 of her salary from a summer job in a Roth, match it and put in another $2,500.

If you put the maximum into a Roth each year for your 16-year-old from 2013 through 2018, when he/she will turn 21, and no other contributions are ever made, the account could grow to a truly tidy sum (in 6 figures) by the time the child turns 65.

A warning - there exists a potential problem with opening a Roth account for a child. Once the child reaches the “age of majority,” usually 18, he/she will have full access to all the funds and can “take the money and run.”

TTFN