It's time to dust off your 2018 tax return and review your 2020 withholding to avoid surprise taxes owed or lower-than-expected refunds in April 2021.
The IRS released its final version of the 2020 Form W-4, with some important changes that could impact both employers and workers. The document reflects changes from the Tax Cuts and Jobs Act that went into effect in 2018. The Tax Cuts and Jobs Act reduced individual income tax rates starting in 2018, leading the IRS and Treasury to overhaul the withholding tables and Form W-4.
The form is intended to make withholding more accurate in conjunction with the tax code overhaul, which affected filers for the first time last tax season. These important changes will ultimately simplify the ability to set and adjust withholding to achieve desired results, such as a specific tax refund amount.
The 2020 Form W-4 features significant improvements and simplification for those with multiple jobs and two-earner families but may require employees to remember specifics from their most recent tax return to properly fill out the form and avoid any issues.
The new form no longer uses withholding allowances. Instead, there is a five-step process for determining employee withholding.
ALL EMPLOYEES MUST COMPLETE:
Step 1. For an employee's personal information and his/her anticipated filing status to determine the standard deduction and tax rates used to compute withholding.
ONLY COMPLETE IF APPLICABLE:
Step 2. For an employee who has:
(1) more than one job at the same time, or
(2) are married filing jointly and both the employee and his/her spouse work.
Step 3. Provides instructions for determining the amount of the child tax credit and the credit for other dependents that you may be able to claim when you file your return.
Step 4. Enter optional adjustments for:
(1) other estimated income for the year (e.g., interest, dividends and retirement income),
(2) deductions other than the standard deduction to reduce withholding, or
(3) any additional tax the employee wants withheld for each pay period.
ALL EMPLOYEES MUST COMPLETE:
Step 5. The employee must signature and date under penalties of perjury.
** It may be important to note **
For those with multiple jobs:
The new form contains a worksheet to help an employee complete Step 2 if you choose not to use the IRS Withholding Estimator.
An employee may claim exempt if:
(1) the employee had no federal income tax liability in 2019, and
(2) the employee expects to have no federal income tax liability in 2020.
Not all employees must use the new W-4 form
The IRS is not requiring all employees to complete a 2020 Form W-4 and prior year versions of the form. Form W-4. The IRS designed the federal withholding tables so that they will work with both the 2020.
you were hired in 2020 or you make withholding changes in 2020
Amid the changes brought about by the Tax Cuts and Jobs Act, many workers were surprised about their refund amounts, whether they were lower or even non-existent. Incorrectly filling out the new form W-4 form could result in similar complications for employees moving forward.
If you withhold too much,
you take home less pay but you wind up with a larger refund the following year.
If you withhold too little,
you keep more of your paycheck, but you might owe the taxman the following spring.
As always, please don't hesitate to call us with any questions you may have.
While we are, of course, available to provide you with any business, accounting or tax services, the information contained herein is general in nature; any advice regarding those services should not be construed as tax advice and is not intended as a thorough, in-depth analysis of specific issues, a substitute for a legal, accounting or tax advice or opinion, nor is it sufficient to avoid tax-related penalties to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact Strive Tax & Accounting, LLC or other tax or legal professional prior to taking any action based upon this information. Strive Tax & Accounting, LLC assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.