What has happened to the W4 form for 2020 - paying a lot LESS federal taxes?

Question

I made a mistake on my 2019 W4 form by claiming way too many dependents (10). I don't know how I ended up with this number but it was seriously wrong since I only have 3 dependents. At the time, while claiming 10 dependents (2019), my check's federal taxes was around 200-250.

When I did my taxes this year I knew I'd end up paying some taxes and it ended up being pretty high around 5k paying back to federal. I talked to our payroll admin and filled out a new form (W4) from the IRS. This new form has changed for 2020. Instead of entering the number of dependents you enter in the number of dependents and multiply it by $2000.

I entered $6000 as I have 3 dependents (really I should enter $8000 (4 dependents) to claim my wife as well as she does not work, but I decided it was ok to pay a little more taxes).

Upong filling out this new form it made my federal taxes worse (I paid much less)! You would think having 10 dependents in 2019 and paying around 200-250 for federal taxes vs now 3 dependents (on the form $6000) in 2020 would make a difference where I'd pay more federal taxes. Now with these changes I only pay around 70-100 dollars per pay check. I thought maybe this was a timing issue and that I needed to give it some weeks to "settle down", but still its coming back with $75-$100 paying for federal taxes (seems way too low).

Only federal seems to be wrong on my paycheck (Social Security, State Taxes (MICH.), etc are all correct - just federal seems wrong). We have exhausted all options thinking it was the company that cut our checks but they said all is well on their end showing 3 dependents. Our payroll admin did some research and stated that this new form has a different algorithm or calculation behind it and that I should just enter an additional amount in item 4c from the 2020 w4 form. Item 4c from the form states the following:

(c) Extra withholding. Enter any additional tax you want withheld each pay period .

So she mentioned entering an amount here, say another 200 bucks, into this field (4c) of this 2020 w4 form.

Has anyone else experienced this? What happened to this form and why did it change in terms of calculations or algorithm? Why did it go from number of dependents to an amount in $$$?

Here is the form: https://www.irs.gov/pub/irs-pdf/fw4.pdf I don't want to end up with this same situation where I am paying thousands of dollars back to the federal government when I usually get back around 4-5k.

Answer 1

What happened was Tax Reform, implemented in 2018. The new tax code pushed through a new withholding table contained within Publication 15. Payroll departments withheld according to the new table and people across the country cheered their 'higher take home pay'. Then when tax time came, it became clear that their total tax bill for the year was little changed, and the extra $200/mo they got was the result of the change in withholding as compared to actual tax due. At tax time, instead of getting back their usual $2500, they got a few hundred dollars or worse, owed a bit. Individuals always had the ability to adjust withholding, and for most W2 employees should be able to do so in a way that gets their tax paid during the year as close to their actual tax due as they wish.

That's the history of how this caught you by surprise. I strongly suggest you forecast your 2020 taxes. It starts with your W2 income, and then on to whether you itemize or are able to just take the standard deduction. The tax rates change each year with inflation, but this has only a minor impact. Each year (except for the year the new tax code hit) I've been able to use the prior year's tax software to make a good forecast. Do this, calculate the amount you'll owe this year, and use the line 4(c) on the W-4 form for extra withholding to get this squared away.

Without disclosing far more person detail, it's tough to tell you about such a change, going from a large refund to owing. I can say, however, that Tax Reform did not offer a decrease to all tax payers. I itemize, so the larger standard deduction doesn't help. The new law eliminated exemptions ($4K+ per person) and also capped the SALT deduction at $10K per year. This was enough to raise the taxes across a group living in areas where homes are expensive and therefore property taxes high. This may be what impacted your taxes as well.

Update: Until this year, the form I linked had a table "Wage Bracket Method Tables for Income Tax Withholding". This has been the case for as long as I can remember and I'm getting old. To OP's last comment "what page this table?" I was away from PC and saw it pop up on phone. My initial thought was "flip through the PDF", but I am now back and issuing an apology. The IRS has moved the tables out of Pub 15 to the new-for-2020 Pub 15-T It's there, I looked. I will update this to edit out this story, within 72 hours.

One might also try the Tax Withholding Estimator on the IRS site.