It’s mere convenience that the w4 is calculated in units of $4050 (which maps to the amount for one personal exemption) rather than doing the whole thing in dollars. In a payroll system the number of allowances is converted back to dollars, which are subtracted from the income for that pay period before calculating the taxes to withhold.
It would be trivial to convert it to use dollars instead. The basic mechanism will still be the same.
The form will need some updating of course because personal exemptions have gone away and the standard deduction has changed. But it’s not going to be some horrible new thing.
In fact the current form is pretty kludgey and horrible when it tries to deal with people who itemize, whose spouse also works, or have more than one job, and then converts it back to a small integer by dividing by 4050.
"It’s mere convenience that the w4 is calculated in units of $4050 (which maps to the amount for one personal exemption) rather than doing the whole thing in dollars. In a payroll system the number of allowances is converted back to dollars, which are subtracted from the income for that pay period before calculating the taxes to withhold.
It would be trivial to convert it to use dollars instead. The basic mechanism will still be the same.
The form will need some updating of course because personal exemptions have gone away and the standard deduction has changed. But it’s not going to be some horrible new thing.
In fact the current form is pretty kludgey and horrible when it tries to deal with people who itemize, whose spouse also works, or have more than one job, and then converts it back to a small integer by dividing by 4050."
Actually, the smartest thing to do is figure out your tax rate and turn it into a dollar figure to take out. That way you aren’t overpaying the government and waiting for your money back in April. The w4 “outrage” is much ado about nothing.
For this to work you have to claim an absurd number of allowances so the calculated tax is zero and the extra amount covers the taxes. I’ve had HR departments give me a hard time. There’s no line on the w4 for “take out $xxx each paycheck”
So what I do is work the process in reverse. I figure out what I will owe, and I reverse-engineered the withholding tables to tell me how many allowances to claim to get to that amount. It’s on a spreadsheet, every year I adjust the transition points from one rate to the next as the brackets change.
I have not coded/installed payroll systems. Am wondering what corporations do with the current W-4 to get the info into the system for appropriate withholding. Might computer program changes be needed in some companies’ software?
“For this to work you have to claim an absurd number of allowances so the calculated tax is zero and the extra amount covers the taxes. I’ve had HR departments give me a hard time. There’s no line on the w4 for “take out $xxx each paycheck””
You need a better HR dept. I’ve done it for years with multiple people.
Turns out some states have their own versions of the W-4 that have to be redesigned, too. Nobody is going to see a tax cut in January, that is for sure – no one’s systems will be ready to handle the changes. And I bet that there will be gobs of mistakes/miscalculations in the rush to get this enacted.
Ya know… this is starting to look like the ACA rollout. Remember how the enrollment system didn’t work the first year worth a darn? And how much it damaged the ACA’s reputation? I see the same kind of pissed off taxpayer wave coming as confusion starts to mount about this bill. Ready, fire, aim!
Lots of companies use a payroll service (ADP is a common one). Presumably, the payroll service takes the formulas and numbers from the IRS withholding tables to calculate how much to withhold from each paycheck based on the W-4. (Presumably similar for state income tax.)
@calmom Thank you for clarification. you mentioned about your kids so I assumed you were not single. Under the new tax law, the standard deduction for single is doubled to $12000, $3000 more than you itemized deduction of $9000, so not as bad as you thought it would be. Hope this helps.
My kids are adults who are married and live in different states from me. I also have a grandchild. But the grandchild doesn’t live with me and I don’t support him— he is my son’s dependent in even numbered years, for whatever that is worth going forward.
Yes, but I no longer can take an exemption because no one can.
So, old law: AGI - deduction - exemptions = taxable income
For me the total of itemized plus exemption is 9000 + 4000 = $13,000
New law, $12,000.
$12,000 is not twice as much as $13,000
Old law, single taxpayer, standard deduction, one exemption: $10K
New law, single taxpayer, standard deduction: $12K
Not “double” - just a 20% increase.
Old law, head of household, 1 kid, standard deduction, two exemptions : $17K
Old law, head of household, 2 kids, standard deduction, three exemptions (single parent with two dependents):
$21K
New law, head of household, standard deduction: $18K (
5% increase when there is one dependent, otherwise the deduction is reduced.
Old law, married, no kids, standard deduction, 2 exemptions: $21K
Old law, married, 1 kid, standard deduction, 3 exemptions: $25K
New law, married, standard deduction: $24K
If couple has no children, there is a 14% increase in deduction; with 1 or more dependents, it is a decrease.
If children are under age 17, then the decrease in deduction would be offset by the increasaed child tax credit-- but once the kids hit age 17, it’s a net loss for anyone whose marginal tax rate was 15% or higher.
No it doesn’t. I explained the math on the deduction in my original post, specifically referencing the fact that the exemption was being lost. I have read the new tax law – have you? I have a law degree, I actually know how to read all the provisions and make sense of them. I am not here asking for advice.
There is a line for having extra taken out over the max for whatever your deductions are. I have almost all of my adjunct pay sent directly to the IRS and the NYS to pay for the taxes on our rentals. We don’t otherwise send tax payments in advance, although we should and are penalized for not doing so.
ADP says they think everyone will have to fill out new W-4s, unless the IRS comes up with some calculation to allow them to do otherwise, and also allows them to continue to accept the old forms. How can the IRS do withholding tables anyway on exemptions that don’t exist any more?
See the link in post #2819. Not everyone uses ADP, too.
IRS is going to have to create new forms, as well as update its own computer systems to accept the information from them. This is a problem because the budget of IRS has been cut back, so they do not have the staff and resources to take care of all the changes in an expeditious manner; and IRS also is working with an outmoded computer system. (IRS literally relies on a 56 year old mainframe computer coded with COBOL as its central data repository)
@calmom Sorry I did not realize you were a grandma. Thank you for detailing your case. It does make more sense that you will enjoy only $1200 more income after the tax cut.
there will be no inheritance tax in the future, you may save up the additional money from the tax cut for your children, grand children then you don’t have to worry about them?
With a law degree, after these many years of experience, and the economy is booming, you may make much more than 50k very soon
Ah… as far as I can tell, pretty much none of us (or our heirs) were ever going to be paying the estate tax as it stood before this bill passed. It only applied to very large estates before this bill.