Tax year 2020 brings us a new Form W-4, Employee’s Withholding Certificate. In addition, the IRS website has a withholding estimator where you can help your clients fine tune their withholding. Let’s take a closer look at the new form, released on Dec. 5.

Instead of using the personal allowances worksheet, the calculation of whether your clients need to take additional withholding is now determined in four steps:

• Step 1: Enter all personal information. This is required of all taxpayers. Only complete steps two through four if they apply to the taxpayer.
• Step 2: Taxpayers who have more than one job, are married filing jointly and have a spouse who also works should complete one of three options to determine withholding amount: use the estimator, use the worksheet in step 2b or check the box and hope for the best.
  • NOTE: The worksheet is on page three of the form. When completing the form, use the tables on page four to determine the amount that is included on line one.
• Step 3: Add $2,000 for each qualifying child younger than 17 and $500 for each dependent who doesn’t qualify for the Child Tax Credit.
• Step 4: Review other income and deductions to calculate any extrawithholding needed. Step 4b calculates teh amount.
• Step 5: Taxpayer files the form. This step is required of all taxpayers.

Example
John and Jane Doe have two children, ages 13 and 17. John makes $80,000 per year, and Jane makes $68,000. They have $5,000 in other income. They itemize, and their itemized deductions equal $27,800. They have no adjustments. What does John’s Form W-4 look like?

Using the worksheet and tables, John determines that he should withhold an additional $362 per pay period. Note that his dependents and deductions nearly match his other income. They offset each other. If there was more income, he might want to increase his withholding to accommodate that income. If he doesn’t have additional income, he might want to decrease his additional withholding.

Providing additional value to clients
So why do we go through this with our clients? Because we provide value to our clients by helping them plan. It is a good practice to have several Forms W-4 at your tax desk to help them through this process. Your clients may want to maximize their refund, but is that really the best result? If you have clients who are disciplined, the best result possible is to have $1,000 available to pay a balance due. It is up to the client to determine what is best for them.

In the following example, the taxpayer has a tax of $5,000. If they withhold $10,000, they lose the use of that $10,000 during the year, but get a refund of $5,000. If they withhold $5,000, they have neither a balance due nor a refund. If they don’t withhold anything (fairly unlikely), they would have a balance due of $5,000 and a penalty for underwithholding. The sweet spot, where the client has the use of the maximum amount of income with no penalty is $4,000.

In addition, Congress passed extenders that were signed into law on Dec. 20, 2019. Extenders include PMI, Personal Residence Indebtedness, and even the Tuition and Fees deduction. Learn more about these, and a variety of other new tax topics at the Are You Ready for Tax Season webinar, on Jan. 14, 2020, at 2 p.m. CST, Jan. 16, 2020, at 10 a.m. CST, or Jan. 18, 2020, at 10 a.m. CST.