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 the amount of income you earned and the amount of taxes withheld from your paychecks during the year. Taxes are withheld from each paycheck so you pay your tax liability in smaller increments throughout the year, and are not forced into the situation of having to pay a large liability all at once when you file your tax return. The amount of taxes withheld from each paycheck is determined based upon the W-4 that the taxpayer completes and gives to their employer. Because the tax code has changed significantly for 2018, all taxpayers should review and update their W-4 based upon how the new tax rules will impact their situation.

Form W-4, Employee’s Withholding Allowance Certificate, is completed at the start of any new job. In addition, a taxpayer’s W-4 should be updated at any point during the year that they experience a substantial life change (ex., having a child or getting married). This form tells your employer how much Federal income tax withholding to withhold from each of your paychecks. The way Form W-4 is completed impacts how much taxes are withheld throughout the year, and may impact whether a taxpayer has a refund or balance due at the time they file. 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 W-4 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 W-4 allowance worksheet 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,
  • An additional allowance if you are using the married filing jointly or head of household filing status,
  • An additional allowance if you’re using the single or married filing separate status and only have a one job, or you’re using the married filing joint status, have only one job and your spouse doesn’t work, and
  • Additional allowances if you qualify for certain credits (ex., child tax credit) and deductions.

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 to ensure the proper amount of tax is withheld during the year and you have the expected result when filing your tax return.

The Withholding Tables

The IRS has created new withholding tables which are intended to take the tax changes into effect and employers have implemented the new tables into their payroll systems. However, the new withholding tables are designed to be used by all taxpayers, and may not account for each taxpayer’s individual situation. Employees will not be required to complete a new W-4 in accordance with the new TCJA. However, with tax reform implementing changes to individual income tax rates, an increased standard deduction, new rules for itemized deductions and a number of changes to personal credits, it is imperative that every taxpayer review their situation and determine if updates to their W-4 are necessary.

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.

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