The Tax Cuts and Jobs Act significantly changed the way individual taxable income will be calculated in 2018 through 2025. While there were many changes affecting individual tax calculations after the Act was passed, perhaps the most significant change was the repeal and elimination of personal exemptions and those that were used by taxpayers to take a deduction for their dependents. Historically, determining one’s federal income tax withholdings as an employee throughout any tax year was based on a mechanical calculation that required counting the taxpayer’s personal and dependency exemptions. Thus, the historical means of computing how much federal income tax should be withheld from an employee’s gross pay is not useful after the enactment of the Tax Cuts and Jobs Act.
To answer this problem, the Internal Revenue Service (IRS) recently issued a 2019 draft version of Form W-4 (Employee’s Withholding Allowance Certificate) and its instructions. The form has been updated to improve withholding accuracy due to the major tax law changes in the Tax Cuts and Jobs Act.
The draft version of the 2019 Form W-4 is one full page with eleven pages of instructions. An individual with a simple tax situation may be able to use the brief instructions on the back of the form; however, those with more complex situations will likely need to use the worksheets provided with the instructions.
The IRS stated that the focus of the form is to move away from the number of withholding allowances to more direct reporting of adjustments to income.
While federal income tax is the personal liability of each employee, employers are likely to find a great deal of confusion among their employee base when dealing with this issue, especially for 2018. The undesirable outcome of having employees write significant checks to the IRS for 2018 income tax liabilities can be avoided with some careful planning at this stage.