There’s new tax paperwork coming in the new year. Be ready.
The new year launches fresh starts, resolutions and, in the case of the IRS, new tax paperwork.
Beginning in January 2020, there will be a whole new look for the W-4 form, which is where workers tell their employers how much money to take out — or withhold — from their paychecks for federal income taxes.
The document overhaul is part of the Trump administration’s changes in the Tax Cuts and Jobs Act, the 2017 law that lowered tax rates, created new exemptions and eliminated others.
Before eyes glaze over at the discussion of tax documents, remember this: setting aside too little money from your paycheck will result in a tax bill to make up the difference. Withholding too much will mean a refund — but some say people shouldn’t be aiming for a refund because that just means they’ve been overpaying Uncle Sam.
Last year, the first year under the Trump tax cuts, many people were disappointed with their refund size and even flipped from getting refunds to owing taxes. That probably happened because they never updated the withholding amounts on their W-4 forms, some experts said.
There are usually lots of eager introductions on a job’s first day, and plenty of important paperwork that can come back to bite you if don’t fill it out with full understanding. Here are some tips on how to handle the new W-4 form.
I already have a job. Do I have to fill out the new form?
No. This form only applies to new hires beginning in January 2020. Of course, if existing workers want to adjust their withholdings, this will be the document they have to fill out.
Workers who have already filled out a W-4, but want to get a sense whether they are withholding too much or too little can use the IRS’ tax withholding estimator.
Alice Jacobsohn, senior manager of government relations at the American Payroll Association, said it was a good idea for everyone for use the estimator. “Even if an employee’s situation hasn’t changed, I recommend a paycheck check-up,” Jacobsohn said. “Just because your situation might not have changed, the tax law changed.”
Think in dollars (and have last year’s tax returns handy)
On the old version of the W-4 form, people used to check off the number of “allowances.” On the new form, they will claim deduction amounts in dollar figures. That method is meant to make the form more tangible and transparent, Jacobsohn said.
That also means it’s wise to have last year’s tax returns handy when you fill out the new W-4, she said. The returns will let you make educated guesses on amounts of outside income when the form asks questions about whether you want tax withheld on money sources like interest, dividends or retirement income.
Be ready for direct questions
The new form asks questions about outside income amounts and whether or not someone works multiple jobs. Some people might not be comfortable sharing those facts if they think their employer will raise an eyebrow about workers who moonlight or have a lot of outside money.
ADP ADP, +0.66%, the payment processing and human resource service provider, says “for maximum accuracy and privacy (to avoid revealing to your employer on your W-4 that you have multiple jobs),” the best way to go is to just use the IRS withholding estimator to tally the requested withholdings and put the amount in box 4 (c). Other boxes about the details can be left blank.
If you’re married, coordinate with your spouse to avoid a tax bill
Say you are starting a new job in 2020, but your spouse isn’t. One option, if the jobs are similar in pay, is checking the box in a certain section, 2(c), to indicate that your spouse is also employed.
Salaries with similar pay could be within $10,000 of each other, said Pete Isberg, ADP’s vice president of government affairs.
If you check the box, make sure your spouse does the same with his or her employer, Isberg emphasized. When both spouses check the box, the higher tax rate applies earlier — which means more money is withheld, minimizing the chance of a tax bill, he explained.
If just one person checks the box, the other spouse could be underwithheld and that could potentially lead to a tax bill, Iseberg said.
There’s one more step on the couple’s W-4 tango.
If both spouses check the box, only one should claim tax credits for dependents and deductions in sections 3 and 4.
That’s because if both spouses are claiming all the household’s deductions, that could duplicate — and overstate — the withholdings, Isberg explained.
Read the instructions carefully in this one spot
There’s one optional portion, step 4(b), asking taxpayers to give the dollar figure on claimed deductions separate and apart from the standard deduction. These types of deductions can include state and local tax deductions, medical expenses, student loan interest and so on.
A single person’s standard deduction is $12,200 and the standard deduction for a married couple filing jointly is $24,400.
Only list the extra deductions, not the standard one. So if a couple has a $24,400 standard deduction and a $10,000 state and local tax deduction, just write $10,000.
Iseberg said tallying all the deductions will cause an employee to be overstating the number, leaving a large gap that will have to be made up at tax time.