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WEDNESDAY, FEBRUARY 3, 2021
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How to update your W-4 to avoid an income-tax surprise
Russ Wiles
Arizona Republic
USA TODAY NETWORK
After a tumultuous year that has up-
ended traditional employment, millions
of Americans could face income-tax
surprises. One way to reduce the odds of
owing a big bill to Uncle Sam — or pay-
ing out too much and thus giving an in-
terest-free loan to the government — is
to check your withholding.
More than a year ago, the Internal
Revenue Service released a redesigned
form W-4 on which taxpayers figure
how much money they should withhold
from their paychecks. Most taxpayers
so far appear to have ignored it.
Three in four individuals received re-
funds last year that averaged $2,500 per
recipient — that’s an interest-free loan
to the government that could certainly
get put to a better use.
Much has changed in the past year,
including job losses and taxable unem-
ployment benefits for some people, tax-
able retirement-account withdrawals,
overtime or extra-hours pay for workers
in many essential industries and a vola-
tile stock market that spewed out cap-
ital gains and losses.
New employees fill out W-4s when
starting a job but often neglect to update
their information after that. Updates
aren’t required, and 45% of respondents
in a recent survey reported that they
didn’t remember when they last revised
their information.
One in nine taxpayers said they had
never heard of W-4s, according to the
survey released by the Harris Poll and
American Institute of Certified Public
Accountants.
Updates aren’t especially difficult or
time-consuming. Now could be a good
time to do it, with a full year of salary,
withholding and other information to
review. A tax withholding calculator
provided by the Internal Revenue Ser-
vice is worth completing first.
What’s different about the new
W-4?
The updated W-4 no longer includes
allowances — which were based on the
number of personal and dependent ex-
emptions you had — and makes it easier
for taxpayers to coordinate their tax sit-
uation across multiple jobs and with a
working spouse, according to the ac-
countants institute.
The new form “provides simplified
steps to account for dependents, multi-
ple jobs and other items that can affect
the amount of tax owed,” said Neal
Stern, a certified public accountant and
member of a financial literacy group of
the organization. The prior version “fo-
cused mainly on the number of taxpay-
ers included in the tax return and often
required use of separate worksheets to
calculate
additional
withholding
needs,” he said.
Based on the organization’s survey,
only 26% of taxpayers have updated
their withholding since the IRS released
the redesigned W-4 in December 2019.
Is it a good time to check
withholding?
Yes. While it’s too late to affect with-
holding for 2020, changes you make
now will adjust amounts for the coming
year.
While there wasn’t sweeping tax-re-
form legislation last year, the financial
situations of many people have
changed. For example, many more
Americans now are receiving jobless
benefits, which are taxable. Some also
have withdrawn taxable funds from re-
tirement plans. Others sold unsheltered
stocks or other investments at a profit.
“If you owed a lot of tax or had a huge
refund, you should take a look at with-
holding to get closer,” said Bailey Tocco,
a certified public accountant and man-
aging director at CBIZ MHM in Phoenix.
Recent pay increases or decreases are
other reasons to take a look, she said.
Some 53% of respondents in a Len-
dEDU survey last year said they were
worried about tax debts in 2021. A good
way to minimize the possibility of owing
money to federal or state tax authorities
is to adjust withholding (or make esti-
mated quarterly payments).
States that levy income taxes have
their own withholding forms — it’s A-4
in Arizona. The Arizona form is easy to
use and intuitive, Tocco said, as you
simply choose what percentage of in-
come you would like to have withheld.
Must taxpayers submit new W-4s?
Aside from starting a new job, no. But
doing so could make for a smoother ride.
“People tend to overlook a few extra
bucks in their take-home pay, but they
sure notice when they get a $300 tax bill
instead of a $1,500 refund,” said Gregory
Anton, a CPA and chairman of the finan-
cial-literacy group for the accountants
institute.
Updates are especially important if
your personal circumstances have
changed, such as taking on an addition-
al job, getting married or divorced, or
having a new child.
If two spouses are employed,
should
both provide updated W-4s?
Yes, each spouse should complete
one. Only half of the survey respon-
dents said they knew about this recom-
mendation.
What’s wrong with withholding
too much?
Many people do rely on hefty refunds
to pay down debts, purchase big-ticket
items and so on. The AICPA survey
found that more than half of respon-
dents purposely withheld an incorrect
amount, with most preferring to over-
pay to receive a refund.
But one drawback is the opportunity
cost of not having use of the money ear-
lier. The IRS typically doesn’t pay much
or any interest on refunds, making over
withholding a poor investment deci-
sion, said Tocco.
“Especially for people who don’t have
much set aside to cover emergencies,
it’s often better to avoid over-withhold-
ing and be able to access the money
you’ve earned if it’s needed for financial
stress like an unexpected major repair
bill or temporary loss of income,” said
Stern.
Besides, the IRS last year was tardy in
paying some refunds owing to office-
shutting measures tied to the pandemic.
Thus, there’s a risk of having to wait
longer than usual for a refund, and
that’s frustrating.
Are there other consequences
of not withholding enough?
Yes. You could incur an underpay-
ment penalty.
“Most taxpayers face a possible un-
derpayment penalty from the IRS if they
owe more than $1,000 at tax time and
haven’t paid in at least 90% of their tax
for the current year or 100% of their tax
for the previous year, whichever is
smaller,” said Stern. States also may
levy underpayment penalties.
According to IRS statistics as of late
July cited by the accountants institute,
the average tax bill for Americans who
owe money at filing time is roughly
$5,500. Yet two in five respondents said
they weren’t confident that they could
pay even a $3,000 tax bill on short no-
tice without borrowing or charging the
balance on a credit card.
Do independent contractors
submit a W-4?
No. These people usually satisfy their
tax obligations by paying estimated tax-
es based on earnings in four equal in-
stallments throughout the year. “How-
ever, employees who have side work as
an independent contractor should con-
sider updating their W-4 to take their
additional income into account,” Stern
said.
What’s involved in filing a new
W-4?
A good first step is first to estimate
how much you might owe using the IRS’
tax withholding estimator. You will
need information handy from a recent
pay stub and your income-tax return
from last year. The IRS estimator allows
you to play around with various actions
that can affect your answer such as re-
tirement-account withdrawals you
might take during the year. You can do it
all anonymously.
Other factors that can make it more
difficult to estimate withholding include
multiple jobs, rental income and addi-
tional investment income, said Tocco.
After that, you should submit a W-4
through your human resources depart-
ment at work, or first download the form
at irs.gov, fill it out and then give it to
your employer.
What if I made a mistake or I’m
not satisfied with the results?
Then you can submit another W-4. In
the accountants institute survey, only
one-third of respondents knew that
forms can be updated throughout the
year.
Reach
the
reporter
at
russ.wiles@arizonarepublic.com.
Count
Continued from Page 1A
Due to COVID-19, HUD is not making
the Point-in-Time count mandatory
this year. Many regions, like Multnomah
County, have sought to delay or opt-out
of the count over coronavirus concerns.
But local officials wanted to be able to
assess and meet with the homeless
population. Anecdotally, advocates are
hearing that the homeless population
has increased. A PIT count would help
confirm this suspicion.
“We opted in because the data is not
only valuable for sending back to HUD
and really demonstrating the need in
our community, but this is our one time
of year when we get the chance to really
identify the number of unsheltered per-
sons that are within not only Salem but
all of Marion-Polk County,” Hamilton
said. “We use that data ... as a launching
pad for demonstrating need or under-
standing the population and designing
evidence-based programming.”
This year, COVID-19 has brought a
new set of challenges for the count. A
shortage of volunteers is leading agen-
cies like the Mid-Willamette Valley
Community Action Agency, which over-
sees ARCHES, to rely more on staff to
conduct the count.
“Asking people to come out and en-
gage with a broad range of individuals —
sometimes 50 to 100 a day — that can be
intimidating especially if you’re in a vul-
nerable population yourself,” Hamilton
said. “We do not want anyone to go out
and risk their lives for the count. We en-
tirely respect everyone’s decision to sit
this one out.”
Those collecting data are given per-
sonal protective equipment and sanitiz-
er, and many interviews are able to be
conducted outside.
Not all the changes are drawbacks,
Hamilton added. HUD is now giving re-
gions two weeks — instead of the usual
seven days — to conduct the count. The
extended window will give staff and vol-
unteers more time to meet and find ev-
eryone, she said.
The count, which surveys people
about where they spent the night of Jan.
25, also collects demographic informa-
tion and is collected via an app. This al-
lows for the swift transmission of infor-
mation so advocates can see where the
population is in real-time, Hamilton
said. The app is a recent addition and
was first used in the area in 2020.
Groups met at ARCHES Tuesday
morning before setting out to West Sa-
lem to not only collect data but also con-
nect people to services, help them into
housing and offer them necessities like
sleeping bags, hygiene items and tents.
Throughout the day and the next two
weeks, volunteers and staff will be con-
ducting similar efforts in Cascades Ga-
Breezy Aguirre with The ARCHES Project hands out tents and sleeping bags to unsheltered people during the
Point-in-Time survey in West Salem. BRIAN HAYES / STATESMAN JOURNAL
teway Park, Wallace Marine Park, the
Market Street underpass at Interstate 5,
in smaller cities like Woodburn and in
rural sections of the county, including
the Santiam Canyon.
After an emergency declaration to re-
duce the spread of COVID-19 pushed
those living on downtown streets into
Cascades Gateway and Wallace Marine
parks, about 200 to 300 people have
made camp in each of the city parks.
Neighbors living near the parks have
said they are “filled with squalor and hu-
man suffering” and have been tied to in-
creased crime in communities border-
ing the parks.
The city’s “unwind” plan for camping
clearly set forth the goal of not clearing
encampments in January to allow for
the annual Point-in-Time Count and
maximize federal resources to the re-
gion.
Hamilton said along with the grow-
ing camps in the parks and under Inter-
state 5, advocates believe the wildfires
and economic impact of the pandemic
have pushed even more people into
homelessness.
“I also know that the population,
generally speaking in the broader com-
munity sense, has grown,” she said.
“This is our chance to capture that.”
For questions, comments and news
tips, email reporter Whitney Wood-
worth at wmwoodworth@statesman-
journal.com, call 503-910-6616 or follow
on Twitter @wmwoodworth
LOCAL
ADVISORS
Salem Area
www.edwardjones.com
Member SIPC
Michael Wooters
Garry Falor CFP ®
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