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The IRS Releases New Withholding Form: Here’s What You Need to Know

The IRS has introduced a brand new Form W-4 — expected to go live in 2020 — and it’s currently open for public comment. You have until July 1st, 2019 to share your feedback with the IRS.

What is Form W-4 and Why Do We Need a New One?

Also known as the Employee’s Withholding Allowance Certificate, employees typically use the W-4 to determine the amount of their Federal income tax withholdings from their paychecks. You’ll need to update your withholdings if you change your employment, get married, divorced, or add dependents to your household in order to avoid over or under paying throughout the year.

This new form is part of sweeping changes stemming from the Tax Cuts and Jobs Act, which went into effect in 2018. Check out  The Treasury Department and the IRS needed to update the withholding tables to account for the increase in the standard deduction, elimination of personal exemptions, and new limitations on certain itemized deductions.

These types of taxpayers should consult with their tax preparer or CPA, take a closer look at the new form, and evaluate their withholdings:

  • W-2 employees who also have a side gig or seasonal job
  • Families with children or other dependents
  • Retirees with social security and/or pension withholdings
  • Taxpayers who used to be able to itemize their deductions but now fall under the standard deduction

“Two-income families and people with multiple jobs may be more vulnerable to being underwithheld or overwithheld following these major law changes,” the agency said in a recent press release.

What’s New?

The new W-4 for 2020 was designed to look more like the 1040 Summary and be more specific than previous iterations. You’ll now be able to account for personally holding multiple jobs, having multiple jobs in your household, and income that doesn’t have tax withheld from it. Additionally, you’ll need to factor in the $2,000 child tax credit (for children under 17), and $500 for your other qualifying dependents.

You’ll also be able to include more details when it comes to your other types of income, which may not have taxes withheld upfront — like retirement income or interest & dividend income.

Tax Withholding is a Careful Balance

Calculating your tax withholding accurately just got more complicated with all of the changes to the tax law over the past few years. If you withhold too much, you’ll get a sizable refund come tax time but you’ve basically given the government an interest-free loan for a year. If you don’t withhold enough, you could end up owing the IRS money the following year.

2018 was the first year of filings under the new tax structure and by and large, refunds were down by approximately 1% compared with 2017, and the average refund shrunk from $2778 to $2729 (according to the IRS) — meaning that fewer taxpayers overwithheld in 2018.

Your 2019 Tax Filing

Even though the new W-4 Form likely won’t go into use until 2020, the IRS is urging taxpayers to take a close look at their current withholding structure to ensure that they’re paying enough towards their tax bill in 2019. Whether you file your own taxes, or work with a tax preparer or CPA, you should definitely take a close look at the details of the online IRS withholding calculator to figure out how much federal income tax you should be deducting from your earnings going forward.