Gone are the days of Single 0, now we have far fewer choices on an even bigger form. And how on earth do I claim exempt?!
With the Tax Cuts & Jobs Act, there were 4 changes to the tax code that are reflected on this form:
- There is no personal exemption
- The Child Tax Credit doubled to $2,000 per child under the age of 17
- There is an “Other Dependent” credit for dependents 17 years of age and older
- The Standard Deduction was significantly increased
Keeping those things in mind, let’s walk down the form for a family with a couple of kids, one wage earner and one side gig.
I think we can all handle Step 1 (a – b), pretty self-explanatory.
Step 1(c) is asking for how you will file your tax return at the end of 2020. For our example, we will mark the box “Married filing jointly.”
We will skip Step 2 because our example only has one income earner.
Step 3 – Time to calculate our credits!
This couple, has survived the bulk of the teenage years with their oldest who just turned 17 and are still having middle school band concerts for their 12-year-old. They will qualify for a $2,000 Child Tax Credit and a $500 “Other Dependent” credit.
Step 3 will have $2,000 listed on the top line and $500 on the middle line with a total of $2,500 for the right-hand column.
Step 4 is a doozy, so go ahead and get another cup of coffee and allow me to explain.
STEP 4 IS OPTIONAL
4(a) is a catch-all category that, as a tax professional, I am so excited to see that I cannot stand myself! Let me back up and explain. “Other Income (not from jobs)” consists of anything that is taxable income, which by statutory definition includes any kind of income you receive unless it is specifically excluded in another statute. In normal people speak, this includes bank interest, investment account earnings, 401(k) or pension plan distributions, babysitting money, Uber income, tips, consulting income, income from Esty sales, gambling income, and yes even illegal income. Just remember, Al Capone was brought down by tax evasion.
4(a) is a guestimate of how much taxable income you will make by the end of 2020 outside of your day job. This income typically does not have any withholding taken out and is possibly subject to additional taxes such as self-employment or early withdrawal penalties. By including an estimate of this additional income on this line, you are requesting that your paycheck withholding also include enough additional withholding to cover this amount of income. While this may decrease your net pay for your paycheck, it can reduce or even eliminate the need for making estimated payments or the possibility of being penalized for not having enough tax paid in at the end of the year. See my Pay As You Go blog post for more information.
Our couple hopes to have additional income of $12,000 in 2020 to help pay off some debt. So, they include that on line 4(a).
4(b) is a combination of your itemized deductions and any “above the line” deductions that you plan on taking. A big caution here! The amount of itemized deductions that are includable on this line is what you are taking ABOVE the standard deduction. Our couple filing jointly, is eligible for a standard deduction of $24,800. They have enough deductions to itemize and will actually be able to claim $32,000 in deductions. DO NOT PUT THE FULL $32,000 ON THIS LINE!! They would only include the $7,200 that they are eligible to claim ABOVE the standard deduction. That is the first number we need to find. Now we need to look at other adjustments we can take.
These include deductible student loan interest & deductible IRA contributions. There are a few other items, but these are the most common. Our couple expects to pay $2,000 in deductible student loan interest and was covered by an employer retirement plan, so not eligible for any deductible IRA contributions.
4(b) will be listed as $9,200; this is the total of the itemized deductions over the standard amount, $7,200 and the amount of expected deductible student loan interest, $2,000.
Phew! Moving on to 4(c). This one is a breeze! This is any specific EXTRA dollar amount you would like withheld. Big caution here!! If you have already included additional income on 4(a), putting an additional withholding amount may double the amount of your withholding.
You are probably still wondering how to go Exempt because you noticed that there is not a box for that any longer; you are so observant. I would highly recommend that you contact your payroll or HR department and ask them what their procedure is to change your status to Exempt.
Our Office policy is to have the employee write in the space beneath 4(c) “I request that no federal withholding be taken out of my paychecks” and initial that line. Please note that we will continue to process your paychecks without any withholding until we are provided a new W-4 form.
Now that we have completed the form, it should look something like this:
If you have any further questions, or your situation doesn’t fit in here, contact your tax professional and schedule a time to meet with them to review your unique situation.