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Revised Withholding Elections Not Needed This Season, IRS Says

Posted on December 27, 2017 by MATTHEW R. MADARA

The IRS announced December 26 that coming withholding guidance will not require changes to existing Forms W-4 for employees to take advantage of the tax reform changes for individuals.

The announcement reiterates that the IRS expects to release withholding guidance in January implementing the tax bill (H.R. 1) formerly known as the Tax Cuts and Jobs Act, which was signed into law by President Trump on December 22. The agency outlined the ambitious time frame for the guidance’s rollout December 15, stating then that the change could affect taxpayers’ take-home pay as early as February.

“The guidance is good news,” said Pete Isberg of ADP, a payroll service provider. The announcement resolves a lot of fears that employers have had about implementing the tax changes, he said, adding, “We were sort of fearing the worst.” 

The IRS noted in its latest announcement that the information in the coming guidance “will be designed to work with the existing Forms W-4 that employees have already filed,”  so “no further action by taxpayers is needed at this time.”

Gregory F. Jenner of Stoel Rives LLP said he isn’t surprised that many taxpayers will be able to rely on their existing W-4s. “The withholding tables have been described as a blunt instrument: They work well for taxpayers in general and, with some planning, for most taxpayers specifically,” he said. 

Isberg had a different reaction, however, describing this approach as “a little bit unprecedented.” Isberg noted that while routine changes to the withholding calculations do not typically require new Forms W-4, there was concern that the elimination of personal exemptions would require revisions to the forms. 

According to Isberg, withholding calculations are based largely on the number of withholding allowances that employees claim on Form W-4, and eliminating personal exemptions raised questions about how the IRS would convert allowances elected in the past for use in 2018. Requesting new W-4s from all employees would be a problem, and “it’s not something that employers can do quickly by any means,” he said. 

Jenner said the tax reform bill made dramatic changes that could throw some taxpayers’ withholding “out of whack,” including to the child tax credit, the standard deduction, the personal exemption, and the state and local income tax deduction. “I think it’s advisable for taxpayers to examine their W-4 calculations and make necessary adjustments so they don’t face any nasty surprises,” he said. 

Isberg said it’s good news that the IRS isn’t requiring immediate action. “I think we need to sit tight and see what the guidance in January looks like,” he said. “My guess is whatever they do would give us some breathing room.”

“Down the road I can see employers or the IRS asking employees to look at their W-4s,” and the IRS would probably release an updated Form W-4 in 2018 that reflects changes in the law, Isberg predicted.