Do you love getting a big tax refund? You shouldn't. You paid more than you owed and gave the government an interest-free loan when you could have been putting that money to better use.
Believe it or not, the government agrees. The IRS prefers that you pay the exact amount of taxes that you owe, saving them the effort of dealing with refunds.
In mid-2018, the agency released a draft revision of the 2019 W-4 form designed to help taxpayers estimate withholding given recent tax changes. The current W-4 bases withholding allowances on personal exemptions, which were removed by the Tax Cuts and Jobs Act (TCJA).
Without exemptions as a guide, how do you estimate your tax bill? The draft W-4 included a worksheet that requires standard tax form inputs like non-wage income, estimated deductions/credits, and taxable wages for all lower-paying jobs within the household.
In essence, the new W-4 becomes Form 1040 Lite. You're doing taxes a year in advance, based on financial information you have to estimate, as you're finishing the previous year's taxes. Simple, isn't it?
No, it's not and the IRS realizes that. Based on feedback from payroll and tax preparation firms, the IRS left the existing W-4 form in place for 2019. A new draft is expected in May 2019, but the fundamental problem remains. There's no way to estimate tax withholding that's both simple and accurate.
Other critics raise privacy concerns. Why is other family income any of an employer's business, especially when an employee's second job is revealed? Employers will still be stuck managing and protecting more information than they need or want.
Since the IRS has all this information, why not just let them do the work? Fill out our tax forms for us, and send us the refunds (or bills). W-4s remain as is, with employees and employers making their best guess.
Great idea, says the public and a few lawmakers like Senator Ron Wyden (D-OR). Bad idea, says the private tax preparation industry and most of the government. Simplification for taxpayers leads to more work for the IRS and the elimination of private tax preparation.
The Taxpayer First Act, recently introduced in the House, would lock into place the current filing system and prevent the IRS from competing directly with or eliminating outright private tax services. The existing IRS Free File program remains as part of the law.
"Again and again in my service in the Senate I have battled the tax preparation software industry to simplify filing taxes for the typical American," Wyden observes. "I will continue to push for my proposal for the pre-filed 'simple' return and the principle that a taxpayer should not have to use a private company to pay their taxes online."
Anytime policy or legislation refers to simplicity, keep one question in mind simpler for whom?
States are facing a more complex problem with estimated withholding. State taxes are often linked to information on federal returns. The TCJA didn't really eliminate the personal exemption it just set it to $0, complicating state formulas.
Some states use the federal personal exemption amount. Others use the number of federal exemptions to calculate their own exemptions or credits. States are trying to compensate in a variety of creative ways, but it's a state-by-state legislative battle that may leave a crazy quilt of state tax laws. Good luck getting states to agree on a standard, especially regarding taxes.
If our government has expertise in anything, it's in complicating things with the goal of making them simpler. Who knows what may happen before the release of the revised W-4? There's plenty of time to pass confusing and misguided legislation.
The government's goal of exact tax payment makes sense, but the IRS burden will be worse at least in the short term. By making the W-4 more like Form 1040, errors are bound to increase. Even those who correctly understand the concept will make estimating errors.
Still, the W-4 will probably change whether we like it or not. Use the IRS withholding calculator at the beginning of the year to set your W-4, and check it throughout the year to verify if you're on track or need to adjust. If you need help, consult with a qualified tax professional assuming they haven't been legislated out of existence in another simplification attempt.
Don't forget about state laws. Check periodically with your state's Department of Revenue website for updated state tax withholding information.
It's painful to keep up with tax news outside of tax filing season, but it's important. You may have to make corrections early in the year to avoid unpleasant surprises next April.
Failing to pay your taxes or a penalty you owe could negatively impact your credit score. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.
Originally Posted at: https://www.moneytips.com/new-w-4-form-shows-craziness-of-tax-program/413
Information contained on this page is provided by an independent third-party content provider. Frankly and this Site make no warranties or representations in connection therewith. If you are affiliated with this page and would like it removed please contact email@example.com