The Trump Tax Reform has brought about a major change in the taxation laws in the US. While the federal tax reform has doubled the standard deduction rate, increased the child tax credit and eliminated certain deductions such as the personal and dependent exemptions, it has also reduced the individual tax rates to 10%, 12%, 22%, 24%, 32%, 35% and 37% from the top marginal rate of 39.6%. In the light of this reduction in the individual tax rates, it is time for you must to reconsider form W-4, Employee’s Withholding Allowance Certificate.
The W-4 form helps employers to determine how much federal tax they should withhold from their employees’ paycheck. Hence, the W-4 form has to be submitted to your employer and not the IRS. Usually, the W-4 form is required to be filled when you begin working at a new firm/company or when your financial situation changes, for instance, if you get married or are expecting a child. However, seeing that the tax situation has significantly changed post the federal tax reform, you must now consider making adjustments in the W-4 form. This is how a W-4 form looks like:
You have to fill out all the important details on the form, that is, lines 1, 2, 3, and 4 (name, address, marital info, and Social Security number), and you also have to mention your tax exemption (if any) on line 7. However, since most taxpayers aren’t eligible for an exemption, they have to input a number in the box in line 5. This number states the allowances you choose to claim and it helps your employer calculate the amount of money he/she should withhold.
How To Determine The Withholding Amount?
Now, let’s get to the interesting part. As a general rule, the more allowances you claim on the W-4 form, the less will be the income tax that your employer will withhold from your paycheck. This means that you get to go home with more money in your pockets. On the contrary, if you choose to claim fewer allowances, your employer will withhold more income tax, thereby, reducing the amount of money on your paycheck.
However, this does not mean that you claim big, fat allowances blindly. The key is to strike the perfect balance. Since the withholding amount is credited to your tax due, an inadequate withholding amount would mean that you have to pay more taxes. Whereas, if you have a generous withholding, you will be eligible for a tax refund. The Personal Allowances Worksheet allows you to calculate the allowances you are entitled to.
On the worksheet, you’ll see that line A and B correspond to one allowance for you and one for your spouse respectively. But, if your filing status is “Head of Household,” you are eligible for one allowance only.
You can claim an additional allowance if:
- You are single or married filing separately and have only one job,
- You are married filing jointly and are the sole earner of the household, and
- Your wage from a second job or your spouse’s wage or the total of both your wages is less than $1,500.
In case you choose to claim the additional dependents, you may also be entitled to additional allowances on line F.
After checking the appropriate allowance options, the sum total of those allowances will give you the maximum amount of allowances you are entitled to claim. It all depends on your employment and the corresponding tax situation for it. You may need to file additional worksheets along with form W-4 if your tax situation is complicated. For instance, if you have more than one job, you must figure out the total allowance amount you are entitled to from all the jobs with just one W-4 form. This means that if you have to fill out more than one W-4 form, you should not claim the maximum allowance amount on each form as your tax withholding will not be accurate then. Instead, you could just choose the highest paying job among all and claim the maximum allowance for it.
Check out the new withholding tables and adjust your allowance and withholding amount on the W-4 form accordingly. And if it gets too overwhelming for you, just give us a call at 1-(888)-482-0279 or simply drop an email at firstname.lastname@example.org. We’ll be glad to help you!