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New, confusing W-4 form is coming for 2020: What to do now to get bigger tax refund  1 Month ago

Source:   USA Today  

If you grumbled about the size of your tax refund or even writing a huge check for your federal income taxes in April, don't expect things to change without tinkering with a W-4. 

And if you think the current W-4 form is a headache, get ready for a migraine with a new form for 2020 and beyond.

Many people still should take time now to withhold more money out of their paychecks to cover their 2019 federal income taxes. Setting aside more money now through the rest of the year can trigger a bigger refund when you file your 2019 return – or you might avoid owing money to the federal government. 

If you're paid every two weeks, you could have a dozen or so paychecks ahead in 2019. It's enough to make a good dent.

Remember, not everyone was thrilled back in April. 

While many did see lower tax bills as part of the Trump tax cuts, some had to hand over money for federal income taxes in April because they had begun seeing slightly more money in their paychecks last year. 

"If they owed money and they were a little surprised by that, they might want to have their withholding adjusted with their employer," said Sandra Shecter, certified public accountant and principal for Rehmann in Troy. 

Throughout 2018, the Internal Revenue Service and others encouraged taxpayers to do a "Paycheck Checkup" to see if their withholding amount was on track. Many people didn't do that – and more likely than not, they're still dragging their feet in 2019.

The IRS calculator for a Paycheck Checkup can help you take a detailed look at your tax situation and better adjust your withholding amount when you file another W-4 form. You would need your most recent pay stubs, as well as a copy of your most recent tax return. 

And you'd need some time to fill out the online worksheet. 

Want a short-hand trick? Pull out your own regular calculator. 

If you owed $2,400 in April for your 2018 federal income taxes, for example, you might have an extra $200 a paycheck withheld beginning in late June if you're paid every two weeks. Figure out the number of paychecks you have left in the year and then divide the that number into what you owed.

See Line 6 of the current W-4 form and plug in a number for the "additional amount, if any, you want withheld from each paycheck." 

A little simple division may not be as precise as the online calculator but it's far better than throwing up your hands and doing nothing. 

Some groups are particularly vulnerable to not having enough money withheld now after the tax changes. They include households with two-income families, high incomes, homeowners who live in high property tax states, families who claim the child tax credit and those who lost deductions under the Trump tax reform, such as tax breaks related to unreimbursed employee expenses. 

For 2018, the IRS waived any penalties related to withholding too little in taxes during the year. In 2019, we can expect those penalties to return.

Shecter noted that some taxpayers will want to pay attention to the rules that could help them avoid penalties. Normally, no penalty applies if tax payments during the year meet one of the following tests: 

Now, of course, is as good of a time as any to reevaluate how much you're having withheld from each check. 

Later this year, we can expect to hear more about the ongoing effort by the IRS to redesign form W-4 for determining how much money your employer should withhold for federal income taxes out of your paycheck. 

The "near-final draft" is expected to be released in July, according to the IRS, while the final version is expected to be released in November in time for 2020.

It's a vast understatement to say that no one, really, will ever use the word "simple" when referring to the revised, five-step W-4 form.

"This essentially is a mini-tax return," said Melanie Lauridsen, senior manager for tax policy and advocacy at the American Institute of CPAs.

The new form attempts to take into account the significant changes that were part of the Tax Cuts and Jobs Act of 2017.

On the plus side, the new form offers a line to reflect how many children you have in your family that are under the age 17 and how many dependents may be older. You'd see Step 3 on the new W-4 to take those ages into account. The age breakdown is important because the dollar amount for the actual tax credits related to children and dependents will vary based on age under the Trump tax revisions. 

"In some respects, they've simplified it," Shecter said. 

Where things could get really tricky, though, is with Step 4 on the new W-4 form.

If you really want to be exact on the amount withheld, there's a section that offers optional adjustments. 

The optional adjustments can reflect other income, maybe from retirement income or dividends. 

The question, of course, becomes do you want your employer to know all your financial business?

"You wouldn't want your employer to know I've got millions in my bank account," said Lauridsen, at the American Institute of CPAs.

So you might not want to disclose on a W-4 that you've got $25,000 or more in "other income" on Line 4a. 

And if you're going beyond claiming the standard deduction, well, you'd be supplying more detailed information on Line 4b for deductions. That would include itemized deductions, such as mortgage interest, charitable contributions, as well as limited deductions for state and local income taxes and medical expenses. And that would reflect other deductions, such as for student loan interest. 

"I guess people will be hiring CPAs to fill out their W-4s," said George W. Smith, a certified public accountant with his own firm in Southfield.

"Good luck to the non-tax expert trying to fill this out," Smith said.

He and others are particularly focused on the format for calculating other income and deductions. How do you correctly project what your deductions – or extra income – will be in the year ahead? 

"In fairness to them, the IRS is trying its hardest to prevent the under withholding of federal income taxes by taxpayers due to the new tax laws in place," Smith said. 

To be sure, there are some shortcuts that you could take with the new W-4.

Employees who have already submitted a form W-4 would not be required to submit a new one simply because of the redesign. If you're taking a new job at a new employer in 2020, though, you're going to have to fill out one of the new W-4 forms. 

To make things really simple, it would be possible to fill out only Step 1 on the new W-4 form and sign it. If that's done, your withholding would only be based on the standard deduction that applies to your filing status and the appropriate tax rates. The risk is that you could owe more than you'd expect once you file your tax return.  

Some who want to increase their withholding and still take a shortcut could just fill out Line 4c to enter "any additional amount you want withheld each pay period." 

Essentially, the new methodology of withholding is meant to account for taxable events or situations such as dual income spouses, interest income, dividends, capital gains, any taxable retirement income.

"The changes attempt to determine what the taxpayer’s actual taxable income and tax may be for the year and withhold accordingly," said James P. O’Rilley, CPA and tax director for Doeren Mayhew in Troy. 

"This is especially important to avoid penalties for underpayment of tax."

Employers had to use new withholding tables in early 2018 in order to get some of the benefits of tax cuts into the hands of the public throughout the year.

But many taxpayers ended up wondering what had happened to their typical refund. 

"In reality, they received a portion with each paycheck," O'Rilley said. "It tends to not feel the same when you get an extra $100 to $200 per month versus a $1,200 to $2,400 refund in April," he said.

Or worse yet, some owed money for the first time in years.

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