Understanding the Withholding Calculator Output

Q: What is a withholding allowance?  Should I claim more of them or fewer?


A: In 2019, each withholding allowance represents $4,200 of income that should not be taxed.  You can claim allowances for various tax benefits, such as itemized deductions that exceed the standard deduction, adjustments to tax (e.g., IRA contributions), and tax credits (e.g., the Child Tax Credit).  The more allowances you claim, the less tax will be withheld, and the fewer allowances you claim, the more tax will be withheld.  The calculator will help you determine the number of allowances that will ensure that you don’t have too much or too little withheld.


Q: Why is the value of a withholding allowance equal to $4,200?


A: Prior to 2018, the withholding allowance value was the same value as each personal and dependent exemption, which increased over time to account for inflation.  Under prior law, that exemption value (and therefore the allowance value) would have been $4,150.  Setting the allowance value at $4,150 for 2018 (even though personal and dependent exemptions were eliminated under the new law) made it possible to construct the 2018 withholding tables so that people in simple situations (one job, no dependents, standard deduction) would not have to submit a new Form W-4 to their employer to account for the elimination of personal exemptions.  The Form W-4 and associated withholding tables are generally the same for 2019; however, the value of one withholding allowance has been increased to $4,200 following the normal procedures to account for inflation.


Q: Why does the calculator tell me that I’m currently on track to get a modest refund, but then it suggests that I have even more withheld?


A:  The calculator projects how much you will have withheld this year if you do not change your withholding. It bases this on the amounts you entered for: (a) the amount of tax you have had withheld to date; (b) the amount you had withheld from your last paycheck for each job; (c) the date you used the calculator; and (d) the date you indicated for the duration of the job this year.  It compares this with an estimate of your tax obligation for the year to determine the extent to which you will likely have either too much or too little withheld over the course of the year if you do not change your withholding.  If it’s possible for you to meet your expected tax obligation by having less withheld (i.e., by reducing your expected refund in exchange for more take-home pay throughout the rest of the year), the calculator suggests how to accomplish that.  (Of course, you can always choose to make no change to your withholding.)  The calculator doesn’t ask you to recall or determine anything else about how you are achieving your current withholding (e.g., number of allowances, any additional amount to withhold, or single vs. married).  It begins by determining how much would be withheld over the remainder of the year if you claimed zero allowances.  If that would result in a refund, the calculator determines how many allowances you could claim while still meeting your tax obligation.  On the other hand, if zero allowances would result in too little being withheld, it calculates the projected balance due and advises you to: (1) enter zero allowances on line 5 of your Form W-4; and (2) enter an additional amount to withhold per paycheck (on line 6 of your Form W-4) that adds up to the projected balance due.  Sometimes that additional amount to withhold is larger than your projected refund if you do nothing.  That’s because the recommended additional amount to withhold is in addition to how much would be withheld if you claimed zero allowances—not in addition to what you’re currently having withheld.  There are several reasons why the additional amount to withhold might be larger than your projected refund if you were to do nothing.  For example:

  • You may already be claiming zero allowances (Form W-4, line 5) and having an additional amount withheld per paycheck (Form W-4, line 6) that is larger than the amount recommended by the calculator; or
     
  • You may have checked the box on the Form W-4 indicating that you are Married, but you want to be withheld at the higher Single rate.

If you follow the calculator’s recommendation by submitting a new Form W-4 to your employer, after that withholding change takes effect, be sure to compare the new amount that is withheld per paycheck with your previous amount; it should be less.


Q: What does the calculator assume about how long it will take for my new withholding to take effect? 


A:  It assumes that it will take around two weeks for you to submit a new Form W-4 to your employer, for your employer to update your withholding instructions, and for those instructions to take effect in the next paycheck.  This means that if you are paid weekly, it assumes that you will receive two more paychecks at your current rate, if you are paid bi-weekly or semi-monthly, it assumes that you will receive one more paycheck at your current rate, and if you are paid monthly, it assumes that it will take effect in the current month’s paycheck if you’re using the calculator in the first half of the month, and in next month’s paycheck if you’re using the calculator in the second half of the month.


Q: Why do the 2019 withholding tables withhold significantly less than I need withheld?


A:  As in prior years, the withholding tables give each worker the benefit of the standard deduction.  However, beginning in 2018 the new tax law almost doubled the standard deductions.  The tables work fine for many people, but there are two common situations in which employees will be underwithheld if they don't adjust their withholding:


Dual Earners:  Those who have more than one job at the same time and married couples who each have a job would be underwithheld for two reasons:  (1) the withholding tables give each of them the benefit of a standard deduction, but they are eligible for only one standard deduction on their tax return; and (2) each job is withheld starting at the lowest tax rate, but their actual tax is calculated on their combined income, which often puts them in a higher tax bracket.  The first of these effects became larger due to the almost doubling of the standard deductions, while the second effect is probably slightly smaller due to the reduced tax rates under the new law.  In any case, dual earners generally need to increase their withholding by claiming fewer withholding allowances and/or having more withheld than will result from claiming zero allowances, and this is especially important in 2018 due to the increase in the standard deductions.


Itemizers:  Those who itemized deductions in prior years typically claimed withholding allowances according to the extent to which their itemized deductions exceeded the standard deduction (since the standard deduction is already reflected in the withholding tables).  Now that the standard deductions have almost doubled, such employees need to reduce the number of allowances they claim for the same amount of itemized deductions, and even if they will now claim the standard deduction.  In both cases, the extent to which itemized deductions exceeds the standard deduction is reduced (perhaps to zero).  This is mostly a transitional adjustment to withholding for 2018 due to the increase in the standard deductions.


Q: Are there any situations in which the 2019 withholding tables will generally withhold too much if one doesn’t submit a new Form W-4 to their employer?


A: Yes.  The most common situation pertains to those who have dependents, such as children.  That is because the new law eliminated dependent exemptions (just over a $4,000 reduction in taxable income per eligible dependent) and replaced them with a substantially increased Child Tax Credit (now generally a $2,000 reduction in tax per eligible child) and a new $500 tax credit for those with other dependents.  Although the tax impact of this change will depend on your tax bracket (those in the lower tax brackets will benefit the most) most people will pay less tax because of this change.  However, the withholding tables don’t automatically account for dependents; you have to do so by claiming withholding allowances, which reduce your withholding.  If the calculator recommended that you increase your number of allowances, it may be because of the increased value to you of these tax benefits.


Q: I am currently married, but I have asked on a prior Form W-4 to be withheld at the higher Single rate.  Should I continue to do that?


A: That will result in having more tax withheld, but it will probably be hard for you to know how much more your withholding will increase or whether that will be enough to meet your need.  The calculator never suggests this option; it always recommends that married taxpayers use the Married status for withholding.


Q: What should I do if I’d like to get a refund of a certain size at the end of the year?


A: The calculator recommends the withholding arrangement that will fully meet your projected tax obligation without having too much withheld.  The amount withheld may be so close to your tax obligation that your refund may be less than you’re used to or prefer.  Realize that to get a larger refund, you will need to have more tax withheld than is necessary throughout the year—meaning less take-home pay.  If you want to do that, and you have a specific refund amount that you prefer, simply follow the instructions of the calculator, but supplement those instructions by entering an additional amount to withhold (or increasing the amount recommended by the calculator) on line 6 of your new Form W-4.  The amount you should enter on line 6 (or the amount by which you should increase the amount the calculator recommends for line 6) is the amount of refund you’d like to receive when you file your return next year divided by the number of paychecks you expect to receive throughout the rest of the year.  So, for example, if you want a refund of around $1,000, and you expect to receive ten more monthly paychecks this year, then simply put $100 on line 6 of your new Form W-4 (or add $100 to the amount that the calculator recommends for line 6).


Q: Will I need to change my withholding again next year?


A: It’s possible that the withholding system could change somewhat starting in 2020 to make it more accurate and simpler for most people going forward.  Please look for announcements toward the end of 2019 to see if you should update your Form W-4 for 2020.  But in any year, there are several reasons why people should update their withholding:

  • If you use the withholding calculator to increase or decrease your withholding in the middle of one year, you should always check with the calculator again at the beginning of the following year.  That’s because any increased withholding you put in place in the second part of one year will compensate for having too little withheld for the first part of that year, but that could become over-compensation (overwithholding) when it continues into the following year.  Likewise, any decreased withholding you put in place in the second part of one year could lead to underwithholding in the following year unless your withholding is reset at the beginning of the next year.
     
  • If your family situation changes significantly—for example, if your marital status changes, your number of dependents changes, you become eligible to itemize deductions (e.g., by buying a house, by increasing your charitable giving, etc.), or you become eligible for new or larger tax credits.
     
  • If you (and your spouse) increase or decrease the number of jobs you hold at the same time.  (Simply changing from one job to another typically won’t change your withholding need, but you will need to complete a new Form W-4 for your new employer.)
     
  • If you increase or decrease your non-wage income significantly.