Tax Reform and changes to your W-4

March 21, 2018 : Monica Welsh

The Tax Cuts and Jobs Act has made significant changes that will affect virtually all taxpayers’ returns.

One of the most significant changes is the elimination of personal and dependent exemptions, as well as increased standard deductions and child tax credits.
 

The Employee Perspective

If you are an employee, you receive a W-2 from your employer each January which shows your income and withholding for the previous year. The withholding amounts are intended to be an estimated amount of income tax that a taxpayer would owe on their income for the year, and allows them to have income tax paid over the year, rather than owed all in April. The withholding amounts are determined by the W-4 that the taxpayer completes and gives to their employer. Because the tax code has changed significantly for 2018, you may feel the need to update your changes to your W-4.

Form W-4, Employee’s Withholding Allowance Certificate, is generally completed at the start of any new job. This form tells your employer how much Federal income tax withholding to withhold from each of your paychecks. This form is extremely crucial in determining your tax liability or refund each tax season. If you withhold too much, you can end up with a large refund, and if you withhold too little you can create a tax liability and possibly an underpayment penalty.
 

Selecting Your Allowances

The more allowances you claim on your W-4, the lower your withholding will be, and vice versa. Therefore, it can be a tricky balance in determining how many allowances you should claim.

The allowance worksheet on the W-4 will help you determine the number of allowances you can take. Generally, you can take an allowance for:

  • Yourself, so long as you are not a dependent claimed on someone else’s return
  • Your spouse, unless that spouse has a job and claims a regular exemption
  • Each dependent

If you are married and have children, and both you and your spouse work, it is extremely important that you coordinate your W-4 allowances. You want to make sure that only one of you claims each child. If any of your children are claimed twice, this will likely result in not enough withholding overall and a liability at the end of the year, which could have been easily avoided with the proper allowances.
 

The Withholding Tables

With the above in mind, and the fact that personal exemptions have been eliminated, it may seem necessary to adjust to the tax reform w4 changes and to possibly eliminate allowances. However, the IRS has created new withholding tables which are intended to take the tax changes into effect. Additionally, the IRS is encouraging employers to implement the changes as soon as possible, and no later than February 15, 2018.

Employees will not be required to complete a new W-4 in accordance with the new TCJA. However, this would be a good opportunity to review your W-4, to take into consideration any changes in your life that have taken place since the last time you completed your W-4. Although personal exemptions have been eliminated, your filing status and any dependents you have will still play a major factor in the amount of tax you will owe, and are still relevant in determining your withholding amounts.

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Determining the allowances to claim on your W-4 has always been a complicated matter, but has become even more so with the TCJA updates. If you are concerned about whether your W-4 is providing you the greatest benefit, please make an appointment to meet with one our Tax Pros. They can assist you in understanding the implications of TCJA on your tax return, and whether a change in your W-4 would be necessary.

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Monica Welsh

Monica Welsh

The Tax Institute, H&R Block

Monica is a tax research analyst in the Tax Institute. She specializes in the areas of business and investment. Monica is a graduate of the University of Missouri-Kansas City School of Law with a JD and an LLM in tax.