The familiar W-4 Employee's Withholding Allowance Certificate hasn't undergone many significant changes in recent years.
However, as the Tax Cuts and Jobs Act (TCJA) completely overhauled the tax rules for individuals, the IRS has been hard at work revising the W-4. This past summer, the agency released a couple of drafts of the new version and its accompanying instructions, and invited comments from the public.
Recently, however, the IRS announced it's postponing the application of the new version until 2020 while it works out some kinks. "Launching the redesigned form in 2020 will allow the Treasury and the IRS to properly implement changes to the withholding system and ensure taxpayers have a positive and simplified experience," said US Secretary of the Treasury Steven T. Mnuchin.
While we wait, here's an overview of the evolution of this new form.
Individual tax changes
The TCJA has brought about a slew of tax changes. Among the key provisions affecting individuals are:
- Most individual tax rates have been lowered and tax brackets adjusted. While the lowest rate remains at 10%, the top rate is reduced from 39.6% to 37%. In addition, the method for indexing future tax bracket adjustments has been changed, which generally is expected to result in smaller inflation-based increases.
- Personal exemptions, including those for qualified dependents, have been eliminated. This may be offset somewhat for certain families by an increase in the Child Tax Credit (CTC), which has been doubled to $2,000. Of that amount, $1,400 is refundable.
- Some itemized deductions have been scaled back and others eliminated. For instance, the deduction for state and local tax payments is limited to $10,000 annually. No deduction is allowed for miscellaneous expenses, including unreimbursed employee business expenses.
Because of these and other related changes, millions of employees who previously itemized deductions may be claiming the standard deduction. This standard deduction generally is effective for 2018 and is scheduled to expire December 31, 2025.
Highlights of W-4 drafts
Tax simplification was one of the initial objectives when Congress tackled tax reform legislation. As a result, the W-4 the IRS initially proposed was only two pages long, half its previous length. The accompanying instructions, however, were 11 pages. Previously, the instructions were incorporated into the four-page W-4 document.
The draft W-4 contains no place to list the number of allowances claimed. What's more, some historical components — including the Personal Allowances Worksheet, the Two-Earners/Multiple Jobs Worksheet — have disappeared.
Instead of featuring the number of allowances, the IRS added lines for the optional reporting of:
- Non-wage income that isn't subject to withholding
- Expected bonuses
- Itemized deductions
- Credits like the CTC
- Wages of other household members
Thus, withholding is tied directly to the calculation for individual income tax liability, rather than the number of allowances. Although this may be a more accurate method, it's also more complicated on the front end.
Some critics maintain that employees may not be comfortable with sharing this information with employers. The American Institute of Certified Public Accountants (AICPA) has strongly objected to the proposal.
On the flip side, the IRS has made it clear that employers and employees will have the option of continuing to use the current W-4s. This reflects the agency's goal to make the system "backwards compatible." So, employees don't have to file a new form and employers can rely on the ones they have on file.
Questions and confusion
The new W-4 drafts seem to raise as many questions as they provide answers. Employers remain confused about certain aspects, such as if the new and old forms will co-exist in the same payroll system. Also, because the new withholding approach is tied to tax liability calculations, employees may be inclined to re-file W-4s whenever they get a pay raise. Other changes in circumstances might require frequent updates.
Bottom line: Due to the new format and the extra calculations, it may be more complicated for employees to figure out their withholding accurately. myPay Solutions will be keeping up with these changes and making necessary adjustments to the software as needed.
For more information, please contact your payroll specialist.