Have you changed your W-4 withholdings?

On December 22, 2017, the U.S. Congress approved a significant tax reform in the Tax Cuts and Jobs Act. The bill took effect on January 2018 tax year, and, depending on your taxpayer situation, the impact of this change can vary. Perhaps your tax bill went up, or it went down, or maybe you didn't see any significant change at all.

One fundamental change that taxpayers will notice is the fact that the old Form-W-4 asks for the total number of allowances declared. The more allowances you claim, the less tax you'd have withheld from your paycheck. Now that personal exemptions are off the table, so are the "allowances." The U.S. federal income tax is a pay-as-you-go tax system, and there are two ways to pay as you go, either through withholding or estimated tax payments.

What is a withholding allowance?

A withholding allowance is a number that your employer uses to define how much federal and state income tax to withhold from your paycheck. The more allowances you claim on your Form W-4, the less income tax will be withheld from each paycheck. The number of allowances you should claim varies, and it is based on several factors. They can be marital status, job status, earned wages, filing status, and child or dependent care expenses.

How do W4 withholdings work?

If you are employed, your employer may withhold income taxes from your paycheck. In addition to your regular pay, your paycheck can include bonuses, commissions, vacation pay, and other amounts. Income tax may also be withheld from pensions, bonuses, commissions, and gambling winnings. In each case, the amount withheld is paid to the IRS in your name. When the withholding rates change, it changes the amounts that are paid to the IRS on your behalf.

How do you check your withholding?

We recommend using the IRS Withholding Calculator on IRS.gov. This tool was intended to help you decide the right amount of tax to have withheld. The amount of income tax your employer withholds from your regular pay depends on the amount you earn.

What is new in the new Form-W4?

The new W-4 now wants you to detail the number of qualifying children in your household, as well as the number of "other dependents" you care for. It also asks you to factor in the $2,000 child tax credit for each child under 17 or the $500 credit for other qualifying dependents. Taxpayers can also account for the income they are bringing in that doesn't have taxes withheld, including freelance or part-time income, retirement income, interest, and dividends. Lastly, you can list the number of deductions you expect to declare if you think you'll be itemizing. This way, you can reduce your withholding and take home more money.

For the most part, it's too late to make dramatic changes to your withholding for the 2019 tax year. Remember: Changes you make to your deduction in 2020 will be reflected in the tax return you file in April 2021.