Benjamin Franklin once said that nothing is certain in the world but death and taxes. If one thing is certain about taxes, however, it’s that the laws surrounding them often change. In 2020, many new and complex changes to tax laws will be unveiled. This will require local government municipalities to be prepared for any changes that might impact their current processes or documentation. To successfully meet any new requirements, municipalities should make sure that the financial applications they use are ready to handle specific changes.
Here is what local governments, their personnel and citizens should know about the upcoming changes:
The new W-4
First and foremost, the new W-4 form is meant to make the withholding and deduction process straightforward and simple. Instead of calculating dollar amounts from the tally of allowances on the W-4, an individual can see the deduction and withholding dollar amounts from the moment she turns in the new form.
It is also important to note that a municipality will not need to collect a new W-4 from each of its employees. Employees can opt to turn in a new form, but a municipality can continue to use the same withholdings and deductions for its current employees.
Any employees who begin their employment on January 1, 2020 or later will be required to use the new W-4 form for withholdings. Therefore, changes to any financial software applications will retain the functionality for processing the allowance-based W-4s.
Although the descriptions of a person’s filing status have changed slightly, equivalents to the old statuses are still in use. New tax tables have been established for the new statuses. For example, “Head of Household” is now a status and not an allowance as it was listed in the previous version of the W-4 form. “Single or Married Filing Separately” is a new status option for those who are married but want to withhold at a higher Single rate.
Calculating taxes for multiple jobs and incomes
Multiple incomes are reported on the W-4 in three ways. The first option is to check the box in Step 2 of the W-4 form. This option works best if you and your spouse are filing jointly and make about the same amount of money or if you work two jobs that require a W-4. For income that does not come from work, such as investments, dividends or retirement income, individuals will now use box 4a. This box allows them to add any income that is not job related so that it can be included in the calculations for tax withholdings.
Instead of using allowances for claiming dependents, individuals will be able to calculate the dependent deduction on the W-4 form. There is a space for calculating the amount of a deduction for dependents under age seventeen and another for all other dependents. These values are combined and added to box 3.
Changes to deductions
Box 4b can be used to claim additional deductions as in the previous W-4. The primary difference is that an individual would use the Deductions Worksheet to calculate the dollar amount.
Wage adjustments for tax calculations
One final change to the W-4 involves wage adjustments before calculating the taxes for an individual. These amounts are either set up in a municipality’s payroll system or will be added automatically. For those who have checked the check box in step 2 on the W-4, the annual adjustment is $0. If the box is not checked but the individual is married and filing jointly, the adjustment is $8,600. Finally, for all others, the adjustment amount is $12,900.
To be clear, this is not additional income that an employee receives. Instead, these adjustments are added to the annual income prior to calculating the taxes for an individual. These adjustments do not apply to the previous W-4 forms that some employees already may have on file with their employer.
How technology can help with changes
The technology solutions municipalities use should be updated in time to reflect the new changes and make it easier to comply. Some key areas where technology can help users with taxes include:
- Updating online employee interfaces to make sure the new statuses are available.
- Updating the Federal Tax Reference Tables. In addition to the base tables for each status, there are additional tables that apply if the employee has checked the box in step 2 for additional jobs.
Taxpayer money is entrusted to be used responsibly by government municipalities. Earning that greater level of trust and confidence from citizens starts with implementing the necessary updates to navigate the new tax laws of 2020.