The overhaul of the W-4 form was brought on by the Tax Cuts and Jobs Act of 2017. The new W-4 form was brought into use in 2020 to accommodate the changes required by that act.
Those changes make what once was a straightforward effort to have taxes withdrawn from your paycheck a bit more complicated. But according to the IRS, the new form will reduce both the number and size of taxpayer surprises that occur due to improper withholding.
For those who prefer that less cash be taken out of their paychecks throughout the year, here's some information about some entries in the new form that will ensure that will happen in 2021.
Your Filing Status
The filing status you elect influences your tax rate and your deductions, each of which affects the amount of your income that's subject to federal income tax. The greater your deductions, the less cash that's taken out of your paychecks. So, carefully evaluate your filing status in terms of which one best limits the tax that's deducted from your paychecks.
Single Filing Status
Assuming you elect the single option, the effects of that filing status are as follows:
Tax Rate: As a single person who files an individual return, you're taxed 10 percent of your income up to $9,875, 12 percent of your income between $9,850 to $40,125 and so on to a maximum of 37 percent on income over $518,400.
Standard Deduction: The standard deduction for the single filing tax status is $12,400 for 2020.
Tax Credits: Federal tax credits can reduce the tax you owe and influence the size of the refund you may receive. Six credits that may apply to you include:
- Earned Income Tax Credit: Your eligibility for the Earned Income Tax Credit and the amount of that credit are based on your adjusted gross income, earned income and investment income. The maximum Earned Income Credit is $6,660 for a qualifying taxpayer who has three or more qualifying children.
- American Opportunity Tax Credit (AOTC): The AOTC helps families pay the costs of higher education. Depending on your income, you may receive a credit equal to as much as $2,500 of the cost of qualified tuition and course materials you pay during the tax year.
- Lifetime Learning Tax Credit: The Lifetime Learning Tax Credit offsets post-secondary education costs for any post-secondary education up to $2,000 per student.
Adoption Credit: This credit is equal to your adoption expense up to $14,300 for qualifying taxpayers.
Child and Dependent Care Tax Credit: The Child and Dependent Care Credit defrays the costs of child care or dependent daycare for those who work or seek work. The credit is as much as 35 percent of qualifying expenses, depending on the taxpayer's adjusted gross income (AGI).
- Savers Tax Credit: The Savers Tax Credit relates to eligible contributions to a retirement plan, such as a qualified investment retirement account, 401(k) or certain other retirement plans. A taxpayer with the least income qualifies for the greatest credit – up to $1,000 for a person filing as single.
Tax Withholding Tables
As stated earlier, the amount of your income that's subject to federal income tax is influenced by the applicable tax rate. New tax rules and tax rates were put in place by the 2017 Tax Cuts and Jobs Act (TCJA) which took effect in 2018. These new tax rates and tax brackets, which are reflected in new withholding tables, deduct less money from each paycheck than was the case before the TCJA.
An assumption of the withholding tables is that each taxpayer, married or not, is the sole wage earner and that each wage earner has one job. So, if you work for more than one company, complete a W-4 form for each job.
Tax Withholding Estimator
The Internal Revenue Service (IRS) provides a Tax Withholding Estimator, an online tool that calculates the tax that should be withheld from each paycheck to help you avoid owing taxes at year's end. You simply specify a certain withholding amount – a possible W-4 entry – and additional bits of information, and the tool estimates your tax liability.
Work with the tool until you identify the W-4 entry that will best achieve your objective – namely, minimize your withholding so you owe more tax at year's end. The process requires information from a recent pay stub and your most recent tax return.
This approach practically guarantees that you'll owe the IRS cash at year's end, but the amount may be small. Also, it increases the risk that you’ll pay an under-withholding penalty.
Need for Revised W-4
If, based on the Tax Estimator results, it appears that on the basis of your current W-4, you'll receive a tax refund at year's end, file a new form W-4 with your employer that decreases the amount withheld from each remaining paycheck in the current tax year. In January, you can repeat the process for the entire 12-month period, then complete a new W-4 form for the new year.
Be aware that, if you owe more than $1,000 above the amount of tax deducted from your paychecks, the IRS may assess a penalty. The same is true if you pay less than 90 percent of taxes due for a current tax year or less than 100 percent of taxes due for a prior year.
If you prefer owing the IRS at year's end, rather than receiving a refund, you may need to complete a new W-4 form to change the tax that your employer withholds from your remaining paychecks for the current tax year. But, before you complete a new W-4, use the IRS Tax Withholding Estimator to calculate to tax you may owe at year's end or the refund you may receive and make your adjustments to the W-4 form accordingly.
- NBC: New year, new tax updates. What you need to know for 2020
- Internal Revenue Service: Tax Withholding Estimator
- Internal Revenue Service: IRS provides tax inflation adjustments for tax year 2020
- CNBC: Here are the new income tax brackets for 2021
- American Opportunity Tax Credit
- Internal Revenue Service: Lifetime Learning Tax Credit
- Internal Revenue Service: Topic No. 602 Child and Dependent Care Credit
- Internal Revenue Service: Retirement Savings Contributions Credit (Saver’s Credit)
- Tax Policy Center: How did the Tax Cuts and Jobs Act change personal taxes?
- Internal Revenue Service:Publication 505 (2020), Tax Withholding and Estimated Tax
Billie Nordmeyer is an IT consultant of 25 years standing. As a senior technical consultant for SAP America and Deloitte Touche DRT Systems, a business analyst, senior staff, and independent consultant, Billie has worked across the retail, oil and gas, pharmaceutical, aeronautics and banking industries. Billie holds a BSBA accounting, MBA finance, MA international management as well as the Business Analyst and Software Project Management certificates from the Cockrell School of Engineering at the University of Texas at Austin.