IRS Unveils New Online Withholding Tool
In an attempt to help taxpayers cope with the new tax withholding laws, the IRS has introduced a new online planner.
Following the passage of the Tax Cuts and Jobs Act of 2017, a number of changes went into place with the national tax code. Among these was the elimination of the personal and dependent exemptions. With these gone, the way employees requested tax withholding needed to change as well.
This was reflected in 2019 when a number of taxpayers found that they did not request enough taxes to be withheld. While the tax plan did decrease tax rates for nearly all income brackets, the loss of the dependent exemption meant that families with more than two children would likely face a higher tax bill.
The Internal Revenue Service has launched an enhanced Tax Withholding Estimator on its website Tuesday. The new tool corresponds with the December launch of its newly redesigned Form W-4 — the first major redesign of the withholding certificate in decades. While the new form is actually more complicated than the older W-4 it replaced, the form’s reliance on fewer worksheets and charts, arguably, would make the tax withholding process simpler.
“The new design reduces the form’s complexity and increases the transparency and accuracy of the withholding system,” the IRS writes on its help page. “While it uses the same underlying information as the old design, it replaces complicated worksheets with more straightforward questions that make accurate withholding easier for employees.”
The vast majority of employees simply need to fill out sections 1 — where the employee fills in his/her personal information and filing status — and 5, where the employee signs the certificate. The online tool is available to help employees with more complicated employment situations, such as working more than one job or working a job that has non-monetary compensation, fill out the W-4.
The IRS is encouraging all employees to use the tool to determine if they will need to adjust their withholdings. If needed, the Tax Withholding Estimator will offer recommendations on how to update one’s online W-4 or will provide a printed PDF for the employee to turn in to his/her employer.
The online tool will allow users to customize their W-4s based on the estimated refund they would like to see. Users can choose from a range of refund options, with the tool recommending withholding options that would best make this happen. The tool can also be used to help W-4s reflect anticipated changes, such as an expected bonus at work or upcoming maternity leave. The W-4 tool can also compensate for social security, pension, and self-employment income.
The IRS had trouble in its redesign of the W-4. Early drafts were criticized for asking too much personal information, such as spousal income. As the W-4 is not a government form, per se, but a guide to help employers properly withhold the correct amount of federal taxes from employees’ payroll, many of the early drafts were felt to give too much information to private employers.
For many employees, the 2017 tax act made no real difference in their take-home pay, necessitating no need for filing a new W-4. However, with 2020 bringing changes to how taxes are withheld, this may change. The new calculation takes into consideration one’s filing status and standard deduction, along with one’s itemized deductions, Child Tax Credit, and other tax benefits as applicable.
These changes, however, may be temporary. Changes to personal non-interest income taxation are due to sunset in 2028, with either a reversal of the changes introduced in the 2017 law or a new tax proposal likely to take effect.