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In the pre-2018 W-4 Personal Allowance Worksheet, you get one allowance for each exemption, i.e. person on your tax return -- you get 1 for yourself, 1 for your spouse, 1 for each dependent. (This makes sense since before 2018, you get a $4050 deduction for each exemption.)

In 2018 and later, you don't get a deduction for exemptions anymore. Yet the 2018 withholding tables "are designed to work with the Forms W-4 that workers have already filed with their employers to claim withholding allowances" (i.e. pre-2018 W-4 forms). I am wondering how that is possible since there is no way for the employer to know how many of the allowances were due to exemptions, and thus don't lead to deductions anymore, and how many of the allowances were due to other things, which still correspond to deductions (the employer only gets the stub with the number of allowances, but not the worksheet to calculate it).

I am guessing that maybe the tables were made assuming a certain "common" number of exemptions (perhaps 2 or 3), since they say "For people with simpler tax situations, the new tables are designed to produce the correct amount of tax withholding." But if you have many dependents, and thus many of the allowances were due to exemptions, does that lead to under-withholding in 2018, since the tables were made assuming fewer of your allowances are exemptions and more of your allowances correspond to actual deductions, when in reality many of them don't correspond to deductions?

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The problem that will make this difficult is when you have a situation where a person adjusted their allowances to minimize over withholding.

This was done when a taxpayer was consistently getting a large refund in April. If they increased the number of allowances on their w-4 by 1 or 2 they could reduce the size of their refund. For a taxpayer in the 25% bracket an increase of 2 allowances reduced their withholding by 2*25%*4050 or $2025 for the year.

Now jump to 2018. If they will now be taking the standard deduction instead of itemizing, that extra 2 allowances will now cause an under withholding. This will be made worse if those extra allowances are treated as if they were for children.

My plan is to wait until I have completed my taxes this spring and then make sure that I safely make the safe harbor numbers for the rest of 2018. It will be better this year to make sure that I have enough withheld to equal to my 2017 taxes to avoid owing a large amount in April 2019, even if they decide to waive the under withholding penalties.

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  • where did you learn that IRS is even considering "waiving under-withholding penalties"? And, just to be specific, are those under-withholding penalties assessed against the employer or the taxpayer?
    – BobE
    Jan 14, 2018 at 16:05
  • I have seen nothing that said they are considering waiving the penalties. But if the adjustments they plan on making that will allow people to not have to make w-4 changes don't work, there may be pressure on those penalties to be waived. This was a major concern when other mid year changes were contemplated in the past.
    – mhoran_psprep
    Jan 14, 2018 at 18:11
  • I'll ask this just because I don't know.... If an employer follows the IRS requirements for withholding and the total withheld results in a substantial amount due the following April.... is their a separate under withholding penalty assesed against the employer ?? ---As an employee I took it for granted that it was MY responsibility to ensure that MY W-4 was constructed to adequately avoid an underpayment penalty the following April.
    – BobE
    Jan 15, 2018 at 19:40
  • I would be very surprised if the IRS doesn't waive underwithholding penalties as they have in the past, at least in some circumstances, due to the change in the law coming so close to the start of the year and the ramifications of the changes taking some time to work out, even for the IRS.
    – prl
    Jan 22, 2018 at 8:45
  • @Bob, if an employer follows the IRS publications specifying withholding rules and tables, there's no way the employer could be penalized. And if the employee follows IRS guidelines regarding updating his W-4 (which currently say it isn't necessary), then it would be grossly unfair to penalize him.
    – prl
    Jan 22, 2018 at 8:51

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