Filing out your W-4 could get much more difficult starting as soon as 2020. Your W-4 is the form you complete to indicate how much to have withheld from your paycheck for taxes. Currently, you simply indicate 0, 1, or 2 where ‘0’ is the most withheld for taxes and ‘2’ is the least.
The new tax law has a goal of more accuracy at tax return time, they would like to owe you 0 and you owe them 0. To achieve this goal, they are going to ask you to complete your W-4 and include more detailed information such as estimated dividends and interest, itemized deductions, expected tax credits, number of dependents, and several other outside tax related items to more accurately estimate your proper tax withholding.
If you routinely receive a tax refund, this could potentially lead to you receiving more in your paycheck. It could make sense to create a plan for that extra money, whether it goes into a retirement plan or a savings account on a regular basis.
If you routinely find yourself paying in for taxes, this could potentially lead to higher paycheck withholdings and a required adjustment to your ongoing budget.
What will be interesting is how this change will apply to retirees taking income from social security, pensions, and retirement accounts. There is sure to be some planning around this update for those in retirement.
There are still a lot of details to be ironed out, but the IRS plans to roll this out beginning in 2020. I’ll be tracking these updates and communicate once they are finalized.
If you have any questions or would like to start planning for this change, please feel free to reach out and I’ll be happy to create a plan for your individual tax situation.