The Changes With Trump’s Tax Law Means Filling Out a New W4

With Donald Trump’s new tax law taking affect in 2018, lot of Americans could see a bump in their paychecks. However there’s a bit of a catch to this new tax law and it may require filling out a new W4 form.

You can use the IRS’ new W4 Calculator here if you’d like to skip to the nitty gritty.

The New Tax and New W4’s

The changes that are enacted in 2018 with the new tax law, for most tax payers, boil down to the doubling of the Standard Deduction and removing the Dependent Exemption while doubling the Child Tax Credit. We will quickly explain what these deductions are:

Standard Deduction

Is a baseline reduction of taxable income that the government gives every tax payer. This has doubled for both single and married tax payers going forward. Previously, tax payers had to determine whether the standard deduction or itemizing was better for them. However, unless you own a very expensive house with a large mortgage, very high medical bills or paid a lot in taxes the previous year to the state, chances are you will not itemize this year. So you will have to take this in account for your new W4.

Dependent Exemption

This was a baseline reduction on taxable income that parents received for each child they claimed. Taxpayers could either factor this in on their W4 or on their taxes. The new tax plan removes the automatic income reduction on child dependents. Most tax payers used this exemption in addition to the Child Tax Credit, to reduce their taxable income. Now the government has just doubled the CTC to $2,000 instead of $1,000. However, the catch is that you can only claim the CTC if your kid is under 17. Previously taxpayers could claim the dependent exemption until their child turned 18 or 23 as long as they were in school. The IRS will allow a $500 credit for dependents over 17, but that is likely going to mean less of a refund for those tax payers.

How Filling Out a New W4 Can Help You

Trump’s tax plan was promoted as a way to put more money into the checks of most taxpayers, however, that largely applies to a small portion of tax payers. First, you would have to know how to change your W4, otherwise you might actually see less, and two, unless your are a simple W2 employee, the change might not be great. This is because the standard deduction is now applied to the tax tables in advance. Let’s look at an example:

George has two W2 jobs, one for $90,000 and one for $25,000. To keep it simple we’ll assume that George doesn’t have health insurance or 401k. Previously George would claim 1 on his W4 and in 2017 it resulted in a refund of about $1400. In 2018, George will actually owe taxes. This is because his second job is being taxed at a lower tax rate but George has to pay taxes at his combined income level of $115,000. In order not to owe taxes, George will have to change is W4 to 0 and withhold an additional $4000 in taxes throughout the year. Which he would then have to figure out how to split that between his two job at a per paycheck rate.

How to fill out a new W4

We suggest heading over to IRS.gov to use the new W4 calculator. Filling out the endless calculations on the new W4 form will be a headache. You’ll need a copy of your last pay stub and an estimate of how much you make. If you are self-employed, talking to a tax professional is going to be the easiest solution on the new tax laws.