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  • Writer's pictureJustin Smith CPA

Individual mandate is gone; the new deal with Form W-4

The 2017 Tax Cuts & Jobs Act repealed the penalty for not having medical insurance all year (the “individual mandate”), but it did not go into effect until 2019. That means there is no tax penalty to be paid this year if you were not covered!

The 2018 penalty was $695 per adult and $347.50 per child on your tax return, or 2% of your annual income (whichever was greater). That penalty has been zeroed out, so non-covered taxpayers have reason to celebrate this year as they will no longer have to pay that additional tax. The individual mandate technically still exists, but lack of a penalty likely means most people will ignore it.

Filling out a new W-4

One of my favorite services to clients is delivering a nice tax refund, followed immediately by an increase in take-home pay through withholding adjustments. That is typically accomplished through analyzing the taxpayer’s withholding tax, and filling out a new Form W-4 (“Employee Withholding Certificate”) to deliver to their employer.

Last fall, the IRS put a twist on the legacy W-4 that has been in place for more than 30 years. If you have started a new job, want to update your tax withholdings or just do a withholding checkup, you have probably noticed the new form. While your existing tax withholdings are grandfathered in, any changes to your withholdings, or starting a new job will now require an entirely new form to be filled out and turned in to your employer.

The IRS updated the form to help reduce its complexity, and it has entirely eliminated the scheme of selecting personal allowances. Now, taxpayers simply fill out their personal information such as name and address, along with their filing status (single/married filing separately, married filing jointly, or head of household), the number of jobs held, and dependents.

The form is designed to more accurately calculate taxpayer withholdings, which may lead to lower refunds at tax time. You have the opportunity to withhold more or less through withholding adjustments, and can use an earnings worksheet to calculate taxpayer/spouse withholdings to help determine what each individual should have withheld through their job.

Generally, you should have more tax withheld if you hold multiple jobs, have a working spouse, or earn extra income from other sources such as investments, rental real estate, and self-employment. You may choose to have less tax withheld if you are eligible for credits or deductions like student loan interest, college tuition or child care.

If you’re not sure where you stand, grab a recent paystub and visit the IRS’ tax withholding calculator, available free online through the IRS Web site. It has been reprogrammed using the new form, and is more user-friendly than the prior version. The site will even fill out a new W-4 for you.

The form was tailored for the 2017 tax reform, which has many provisions currently set to expire after 2025. More changes are likely to come, so it’s always a good idea to do a paycheck review at least annually.

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