You may or may not have heard that the IRS launched a new redesigned Form W-4 used to adjust federal tax withholding, which is effective starting with tax year 2020 taxes (the ones filed in 2021).
The IRS created the new Form W-4 Employee’s Withholding Certificate (formerly W-4 Withholding Allowance Certificate) to help taxpayers figure out their correct withholding after tax law changes like reduced tax rates, changes to itemized deductions, increased Child Tax Credit, the new Other Dependent Credit, and the elimination of dependent and personal exemptions.
The IRS is not requiring all employees to complete the new 2020 Form W-4. Instead, they have ensured the federal withholding tables were designed to work with both the new version of the form and existing withholding calculations from prior years. The only employees required to fill out the form are new employees and employees who want to change their withholding.
Don’t worry about figuring out the details of the Form W-4 changes and how to calculate your 2020 W-4 withholding. TurboTax breaks down 4 key highlights you need to know about the W-4 Employee’s Withholding Certificate.
Here are the 4 key changes you need to know about the redesigned Form W-4:
- Elimination of Personal Withholding Allowances – One of the biggest changes on the redesigned W-4 form is the elimination of personal withholding allowances. Instead, the form uses a 5-step process and new Federal Income Tax Withholding Methods to determine actual withholdings. In the past, the value of withholding allowances was also tied to personal and dependent exemptions, but those exemptions were eliminated under tax reform.
- Focus on Dependents and Other Tax Credits – Step 3 of the form allows you to indicate that you are eligible for the Child Tax Credit and the Other Dependent Credit if applicable. You can also include additional credits like education tax credits in this section to more accurately refine your withholding amount.
- Account for Additional Adjustments – Step 4 of the form is an optional section where you can (a) make adjustments for additional withholding if you have other income like interest, dividend, and retirement income (b) reduce withholding in this section if you have deductions besides the standard deduction, like itemized deductions, and additional tax deductions, like student loan interest (c) enter any additional income tax you would like withheld from each paycheck including any amounts that need adjustments because you or your spouse may have more than one job.
- Exemption Line is Removed – Although there is no longer a separate section to claim an exemption from withholding, you can still claim exemption from withholding by writing “Exempt” in the space below 4C.
Form W-4 is completed and submitted to your employer so they know how much tax to withhold from your pay. Typically, you would file a new W-4 when your personal or financial situation changes. If you have a simple tax situation (W-2 income and claim the standard deduction) you may not need to file the new IRS Form W-4, but you should file the new Form W-4 with your employer if you are impacted by tax law changes, your personal situation changed, you started a new job, or you didn’t see the outcome you expected when you filed your 2019 taxes this year.
Don’t worry about knowing how to figure out your withholding. If you have questions and used TurboTax Live to do your taxes this year you can connect to a TurboTax Live CPA or Enrolled Agent with an average 15 years-experience to get your questions answered about your tax situation, year round. TurboTax Live CPAs and Enrolled Agents are available in English and Spanish.
IRS also has a Tax Withholding Estimator to help you estimate your federal tax withholding.