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Why Federal Taxes Are Potentially Different

We are receiving several questions regarding federal withholding. More specifically, employees questioning why there were little or no federal withholding on their paychecks. What we are finding is that the answers lie within how employees have completed the redesigned Form W-4.

The Form W-4 was significantly redesigned in 2020. Prior to the redesigned form and depending upon your circumstance, you might have previously under-withheld and owed money, or over-withheld and received a larger refund than usual when you filed your taxes. That may no longer be the case with the redesigned Form W-4. In other words, it is possible that individuals who previously had federal tax withheld is no longer having tax withheld after completing the redesigned W-4. Some employees may have completed the redesigned W-4 correctly and some may completed the form incorrectly, causing them to owe money when filing taxes. What can employees do if they feel tax or more tax should be withheld from their paycheck?

In order to answer that question, we need to take a step back and understand why the form W-4 was redesigned. The Tax Cuts and Jobs Act in 2017 significantly changed how the federal income tax system works. Some of the changes included removing personal exemptions and increasing the standard deduction. In other words, you can no longer claim personal exemptions or dependency exemptions. However, the new tax changes didn’t work well with the previous version (prior to 2020) of Form W-4, which then led to the redesigned form. The redesigned form was simplified to include more straightforward questions so employee’s withholding would be more accurate. More accurate meaning, not owing a large amount of money nor getting a large refund when you file your tax return.

Now that we have a general understanding why the form was redesigned, where can employees find more information about how to complete the redesigned Form W-4 for their circumstance?

The IRS FAQs webpage (https://www.irs.gov/newsroom/faqs-on-the-2020-form-w-4) offers guidance with completing Form W-4. Below are only a few of the FAQs.

  • If you just complete step 1 and sign the form, your withholding will be computed based on your filing status’s standard deduction and tax rates, with no other adjustments.
  • The IRS suggests that you may consider increasing your withholdings if you hold more than one job at a time or you and your spouse both have jobs (Step 2) or you have income from sources other than jobs or self-employment that is not subject to withholding (Step 4(a)). The IRS also notes that if you do not make adjustments to your withholding for these situations you will very likely owe additional tax when filing your tax return, and you may owe penalties.
  • The IRS suggests that you may consider decreasing your withholding if you are eligible for income tax credits such as the child tax credit or credit for other dependents (Step 3) and/or you are eligible for deductions other than the basic standard deduction, such as itemized deductions, the deduction for IRA contributions, or the deduction for student loan interest (Step 4 (b)).
  • Here’s a popular question:  How should I complete the redesigned Form W-4 if I want a refund when I file my tax return? The IRS reminds us that the redesigned Form W-4 makes it easier for you to have your withholding match your tax liability. But, if you prefer to have more tax than necessary withheld from each paycheck you will get that money back as a refund when you file your tax return. The IRS also notes to keep in mind that you do not earn interest on the amount you overpay. The simplest way to increase your withholding is to enter in Step 4(c) the additional amount you would like your employer to withhold from each paycheck.

Lastly, the IRS Tax Withholding Calculator (https://www.irs.gov/individuals/tax-withholding-estimator) may be a good resource for employees. The calculator is a tool employees can use to guide them through completing the W-4.

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