How to fill out a W-4 to avoid tax reform surprises
What do starting a new job, getting married, having a baby and tax reform have in common? The answer is not a punchline but tax advice: they all could mean updating a W-4. Taxpayers should update their W-4 with their employer after life events so the employer can withhold the right amount of taxes from their paycheck. This year, for some taxpayers, the new tax reform law is like a life event and updating a W-4 is the best way to prepare for the law’s impact and avoid surprises.
Updating a W-4 can help taxpayers avoid surprises because it determines how much tax is withheld from their paychecks. If they prefer to get a larger refund, they should increase their withholding. If they would like more money throughout the year in their paychecks, they should decrease their withholding.
Although 2018 tax withholding tables have been updated for the new tax rates under the new law, taxpayers might still want to update their W-4. Jackie Perlman, Principal Tax Research Analyst at The Tax Institute at H&R Block gives an example of a single taxpayer with no kids and a $35,000 salary. This taxpayer could get a $600 refund this filing season for his 2017 tax return. In addition, because of the withholding table changes, his semi-monthly paycheck will automatically increase $32 starting this month. But when he files his 2018 tax return next year, he would get a $500 refund, $100 less than he received for 2017.
“Even though his overall tax liability has decreased, he will get a smaller refund next year. If he would like that money as a refund rather than in $32 installments over the year, he will need to update his W-4 with his employer to increase his withholding,” said Perlman.
On the other hand, Perlman gives an example of a family of four with a salary of $90,000 and a $780 refund for 2017. Their semi-monthly paychecks will increase $61 starting this month because of changes to the tax withholding tables. Even with this increase in their paychecks, when they file next year, they will get a $2,000 refund. If they would like that $2,000 during the year, they will need to update their W-4s to decrease their withholding.
How to fill out a W-4
To fill out a W-4, an employee will need their personal information including their name, Social Security number and address. They also need to know some tax information: their filing status and number of dependents, including children who qualify for the child tax credit. Taxpayers can use a W-4 calculator to determine the best number of allowances to get the outcome they want or they can use the personal allowances worksheet on the W-4 form itself, which includes extra calculations for taxpayers who itemize deductions, claim tax credits, have more than one job or have multiple earners on the tax return. Especially important for 2018, taxpayers who itemized in 2017 may or may not find it beneficial to itemize in 2018 because of the increased standard deduction.
Once the employee determines the number of allowances to claim, they should contact their human resources department to submit the new W-4.
Help filling out a W-4
Though the form itself is short, there are additional worksheets required to determine the correct number of allowances. In addition, the form and its worksheets will not tell the employee how much will be withheld, what their paycheck will be or what their refund or taxes owed will be. More allowances result in less withholding and more take-home pay. Conversely, fewer allowances result in more withholding and less take-home pay. For help filling out a W-4, taxpayers can use a W-4 calculator or make an appointment to talk with an H&R Block tax professional, who can provide a personalized analysis of 2018’s tax liability to help taxpayers know how to adjust their W-4.
“Tax reform impacts everybody differently, so it’s important to look at your unique situation and W-4 instead of relying on information you may have filled out years ago,” said Perlman. “And if you need help, this is the perfect time to talk to a tax professional. You’re already looking at your 2017 tax return, so ask your tax pro about 2018.”
The results of H&R Block’s W-4 survey show consumers not only haven’t updated their withholding after tax reform, but many don’t even know how.