Form W-4, which instructs your employer on how much tax to withhold from your paycheck, received a makeover at the start of 2020. It’s the first major redesign of the form in 33 years, dating all the way back to 1987. The adjustments simplified the form and implemented the tax code changes that went into effect as part of the Tax Cuts and Jobs Act of 2017.
To some, the new design may seem a bit overwhelming. But, in reality, it’s a lot more straightforward. Let’s take a look at the primary changes.
Allowances are no longer a thing
While Form W-4 endured some serious body work this year, the main change to call out is the elimination of allowances. And considering allowances were the basis of payroll withholding for almost forever, this is quite the change.
Previously, if you claimed more allowances, less tax was withheld from your paycheck. If you claimed less, more tax was withheld, and your paycheck shrank in size. In the latter scenario, you’d receive whatever money you overpaid throughout the year as a tax refund when you filed your return.
Now, employees simply use Form W-4 to provide their employer with the information needed to determine the amount of tax to withhold. That includes details like your expected filing status, income from any other jobs, number of dependents, and the tax deductions you plan to claim. Once your employer has that information, they will do the calculations to determine how much to withhold from your paycheck.
This is a much simpler process for most people. So, sayonara allowances!
The need to complete a new Form W-4 is debatable
If you’re wondering whether you need to rush to update your Form W-4, don’t sweat it. There’s a good chance you don’t need to update anything. Most employers are not requiring their employees to submit a new W-4 form for 2020. If you’re happy with your tax outcome, there’s no need to change a thing.
That said, the ideal state is for your annual withholding and your tax liability to be very similar. That means when you file your tax return, you don’t end up owing a lot or receiving a large refund. Because remember, a large refund just means you gave the IRS an interest-free loan the entire year. It’s not free money from the government. You worked for it the prior year. Therefore, if you want to change your tax outcome – perhaps to lower your refund and keep more of your hard-earned money in your pocket – then submitting a new Form W-4 is a smart move. Check out the IRS’ Tax Withholding Estimator to determine if you should update your information. It’s most beneficial to make any changes as early in the year as you can.
If you experienced a major life change this year, that’s another good reason to update your Form W-4. That includes events like getting married or divorced, having a baby, adopting, or buying a home. It may even be worthwhile to update your information if you or your spouse received a significant pay raise or pay cut.
The complexity of the form is based on your tax situation
The level of difficulty in completing the new Form W-4 is entirely based upon the complexity of your taxContinue reading