Most changes under the new tax bill signed into legislation in December of 2017 took effect this past January for the 2018 tax year. Depending on a taxpayer’s situation, the impact of that change can vary. Most people’s tax bills will likely go down, while others may end up owing more in taxes than they would have before tax reform. Some may simply see no big change at all.
To stay on top of how the Tax Cuts and Jobs Act impacts your tax situation, start by reviewing your Form W-4, Employee’s Withholding Allowance Certificate, filed with your employer. Form W-4 lets your employer know how much federal tax to withhold from each of your paychecks. Based on your financial situation, you may want to have more or less withheld from your pay in 2018 than you did under last year’s tax rules. That’ll help make sure you don’t have too much or too little income tax withheld throughout the year.
Recently, the Internal Revenue Service (IRS) released an updated Form W-4 to coincide with the tax reform changes. While the new form does not affect 2017 tax returns due this April, there are a few things you should know about the new version before making any adjustments. Here are some answers to common questions people have about tax withholdings under the new tax reform.
Does everyone need to adjust their income tax withholding for the new tax law?
Despite the change, there’s a good chance you don’t need to file a new Form W-4 and adjust your tax withholdings. That’s because the IRS provided new income tax withholding tables to all employers that work with the 2017 version of Form W-4. A withholding table shows your employer how much federal income tax they should withhold from your paycheck based on your total wages, marital status, and the number of allowances you claimed on Form W-4. You can use the new IRS Withholding Calculator to determine how you should adjust your withholdings based on the changes.
Of course, if you usually get a big refund or owe too much tax when you file your return each year, you should always consider adjusting your income tax withholding to better suit your financial situation. It’s also a good idea to consider adjusting your withholding whenever you have a significant life event, such as marriage, divorce, the birth of a child, or buying a house.
How will the new 2018 Form W-4 be different than before?
Regardless of the revisions made to the form, however, the logic remains the same. The more withholding allowances you claim, the less federal income tax you have withheld from your pay. And alternatively, the fewer allowances you claim, the more federal income tax you have withheld from your pay.
Am I required to file a new Form W-4 for 2018?
If you remember tax reform in the mid-1980s, you may recall that everyone was required by the IRS to submit a new Form W-4 to their employer. That’s not the case this time. You can file a new Form W-4 for your existing job anytime you want, but you are not required to do so.
Who should file a new Form W-4 to avoid a big tax bill?
According to the IRS, taxpayers who have more than one household income will most likely want to reexamine their income tax liability and adjust their tax withholding. But that’s always been the case.
It’s difficult for one person’s Form W-4 to withhold the perfect amount of income tax for their situation when that person’s employer has no understanding of their other financial information, such as how much money their spouse makes or has withheld for taxes. If you live in a two-income household, it’s up to you to estimate your taxes and make sure you have the right amount taken out to cover your complete financial picture.
Some people may also need to have more tax withheld to avoid a big tax bill if they lost certain tax benefits due to the tax reform. For example, in the past, taxpayers who had dependent children age 17 or older would have claimed a personal exemption for them on their Form W-4. But, since the personal exemption is no longer available for 2018, they can no longer follow that same path. And since their children are over the age of 17, they don’t qualify for the expanded child tax credit either.
All is not lost, however. The tax reform introduced a new $500 tax credit for non-child dependents. That means you can claim a credit on your tax return for every person that lives with you and is age 17 and older. The credit is designed to provide relief to taxpayers who lost the personal exemption allowance and aren’t eligible for the expanded child tax credit.
Additionally, if you previously claimed a large itemized deduction for state and local taxes or property taxes, you may want to decrease your withholdings allowances for 2018 to have more taxes taken out to avoid a big tax bill. The deduction will now be capped at $10,000 so it’s possible it will not provide as much tax benefit as in the past.
Who should file a new Form W-4 to avoid having too much income tax withheld?
People who owe less tax in 2018 shouldn’t have to worry about filing a new Form W-4 because the income tax withholding tables were adjusted to account for the main differences in the tax code.
If you have children under age 17, you could adjust to having less withheld because you will likely receive a tax benefit from the increased child tax credit.
If you usually take the standard deduction, meaning you didn’t have enough expenses to itemize your deductions, you may find the new tax law works in your favor. That’s because the standard deduction doubles for 2018.
How should I create a new Form W-4?
You should always be able to pick up a copy of Form W-4 from your employer. Check with the human resource or payroll department for assistance. You can visit the IRS website to download the form as well.
TaxAct also provides a variety of quick resources to help you update your W-4 form. The product includes a withholding calculator to assist you in determining how many allowances you should claim. It will also complete the form for you based on those calculations. If you want to estimate how the tax reform changes may impact your total tax outcome for 2018, you can use the Tax Reform Calculator.
After I complete a new Form W-4, how do I file it?
Give your new Form W-4 to your employer’s human resource or payroll department. Do not send it to the IRS.