Everything You Need to Know about the W-4

Anyone who’s ever started a new job is familiar with form W-4 (Employee’s Withholding Allowance Certificate). To ensure you’re paying the correct amount of federal income tax each year you want to make sure your W-4 is correct and up to date. This includes changes in your address, filing status, and even loss of certain tax deductions or credits.

With the passage of the Tax Cuts and Jobs Act in December of 2017, it’s never been a better time to dust off that old W-4 and update your withholdings for 2018.

The 2018 W-4 is roughly the same as the 2017 version. The main exception is the withholding tables that compute your tax allowances. With the passage of the Tax Cuts and Jobs Act came rate cuts across the board – this means more money in your paycheck each pay period. However, there are several differences in the tax law for 2018 that could greatly impact your tax liability. Here are just a few:

Elimination of the Personal Exemption

Personal exemptions are out in 2018 and in their place is an increased standard deduction. This directly impacts your W-4 because the number of allowances you are claiming is somewhat convoluted.

You can no longer claim a personal exemption for yourself, your spouse, or even your dependents, so claiming “Married 2” doesn’t mean married with 2 dependents anymore.

The best way to figure out how many allowances you should claim is by projecting out your 2018 tax liability. Here is a useful tool help you determine your federal income tax! Simply chose the scenario that best matches your family size and annual income and see how much tax you should pay in throughout the year.

Once you have a ballpark number you can talk to your payroll department to determine how many allowances you should claim. Remember, if you’re married then you should adjust your allowances based on your portion of the estimated tax liability.

Enhanced Child Tax Credit

Here are some highlights on the 2018 enhanced child tax credit:

• Child tax credit is increased from $1,000 per qualifying child to $2,000 per qualifying child.
• Phaseout threshold increased to $400,000 if married filing jointly and $200,000 for any other filing status (which is an increase from $110,000 if married filing jointly, $75,000 if filing as single, and $55,000 if married filing separately).
• Taxpayers may claim a $500 credit for each dependent who is not a qualifying child.

To make up for the elimination of the personal exemption, Congress enhanced the child tax credit. The credit will be doubled from $1,000 to $2,000 and can be claimed by higher wage earners.

This change alone may have a significant impact on your 2018 taxes and won’t be reflected in your W-4. That’s why it’s important to project out your 2018 taxes and determine how many allowances you need to claim to pay in the appropriate amount of tax.

Itemized Deductions

In 2018 the number of taxpayers who itemize is expected to drop from one in three to one in ten. With the increased standard deduction and the cap on certain itemized deductions your 2018 tax return might look vastly different. Here are just some changes that might impact whether or not you itemize in 2018:

• State and local tax deduction is capped at $10,000. If you paid $12,000 in property taxes and $8,000 in state income tax then you can only deduct $10,000.
• Standard deduction is increasing from $6,350 to $12,000 for single taxpayers, from $12,700 to $24,000 for married taxpayers who file jointly, and from $9,350 to $18,000 for those who qualify to file as head of household. This means you’ll need more than $24,000 in itemized deductions if you’re a married couple. If you don’t exceed the standard deduction then all those itemized deductions are wasted.
• All miscellaneous itemized deductions subject to the 2% floor under current law are repealed through 2025. This means you can no longer deduct brokerage fees, accounting fees, and unreimbursed work related expenses.

If you are one of the millions of taxpayers who will be choosing the standard deduction instead of itemizing deductions as in years past then that isn’t necessarily a bad outcome.  With the increased standard deduction, enhanced child tax credit, and the reduction of tax rates, taxpayers could still see a tax break without having to itemize their deductions.

Consult With a Tax Professional

The best way to determine if your W-4 is accurate and up-to-date for 2018 is consulting with a tax advisor. There is nothing worse than being surprised with a massive tax bill at the end of the year so it’s important to see how the new law will impact your 2018 return.

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This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer. 
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