New W-4 forms – to establish employee tax withholding

The IRS is rolling out a new Form W-4 for use in year 2020. W-4 forms (“Employee’s Withholding Certificate”) are completed by employees and given to their employers, and are used to determine the amount of federal income tax to be withheld from the employee’s wages.

2018 was an odd year for many taxpayers. The new laws resulting from the wide-reaching Tax Cuts and Jobs Act lowered taxes for many, but behind-the-scenes changes based on existing W-4 settings caused tax withholdings to drop by even more. This caused some filers to owe money when filing their 2018 returns, or receive smaller refunds than usual. 2018 (and now 2019) W-4s were made available, but they did not accommodate the law changes very well.

The 2020 Form W-4 is available now only in draft form, but unlike its 2018-2019 predecessors, it has been overhauled to address recent tax laws. It no longer focuses on exemptions based on household members, because exemptions no longer are deductible. It also addresses situations overlooked by many taxpayers: Those who receive wages from two sources, or joint filers who are married to a spouse who also collects wages. Each source of income may withhold enough tax to cover its own income, but each one might also ignore the fact that there are other sources of income that when combined, drive the taxpayer into a higher tax bracket. Prior versions of W-4 addressed this somewhat, but not very prominently, like the 2020 version will.

When the 2020 W-4 is soon finalized, all employees should consider completing a new W-4 for each place of employment. Doing so should optimize their income tax withholding, and help avoid nasty April 15 surprises.