Tax Articles

Clients May Need to Take a Second Look at Form W-4

Intuit ProConnection Really Simple
You can bring these articles to your desktop as soon as they are published.


Already a ProConnection subscriber?
Update your profile and personalize your ProConnection experience.
Update your profile

Not a subscriber yet?
Sign up now for free and start receiving customized newsletters directly to your inbox.
Sign up now

It’s always prudent to do an annual review of your clients’ Form W-4s. While such a review would typically take place at the end of the year, we now live in more complicated times. Developments since the beginning of 2009 may require withholding adjustments.

The Good Old Days of 2008

A year-end review of the W-4 would review the client’s tax situation and adjust withholding accordingly. For example, a client may get married or divorced, the number of dependents may change, or the client’s outside income may change. Depending on the situation, these changes may entitle the client to fewer withholding allowances or additional allowances.

Even if clients participated in such a year-end review, a second look at their Form W-4s may be in order.

For Special Attention

Here are some key areas to consider.

“Making Work Pay” Credit and Under-withholding

Clients with earned income are entitled to a refundable tax credit of up to $400 for individuals and up to $800 for marrieds filing joint returns. For clients who are wage earners, the credit will typically be reflected in their paychecks in the form of reduced withholding as a result of new automatic withholding changes that took effect on April 1. However, some clients may need to file a new Form W-4 to avoid under-withholding. For example:

1. If a client has two jobs, each employer’s withholding may reflect the maximum credit. Thus, the client’s combined withholding will be reduced by twice the maximum credit allowed—and he or she will be under-withheld.
2. Under the new withholding changes, a client’s withholding will be reduced by roughly $600 during the remainder of the year if he or she files jointly. But if the client’s spouse also is employed, the spouse’s withholding will be reduced by $600 as well. So the withholding changes will cut their withholding by a total of $1,200--$400 more than the maximum credit allowed.
3. The Making Work Pay credit phases out for clients with modified adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly. So working spouses who each earn $100,000 are generally not entitled to one dime of the credit, yet their withholding may be reduced by as much as $1,200 (see #2).

A client’s working child may also be under-withheld. An individual who can be claimed as a dependent on someone else’s return is not entitled to the Making Work Pay credit. However, the child’s employer does not take this into account and the child may be under-withheld by $400.

First-time Homebuyer Credit

A client who purchases a principal residence between January 1, 2009 and December 1, 2009 is entitled to a tax credit of up to $8,000 if he or she has not owned a principal residence during the three years prior to the purchase. The credit is reduced or eliminated for higher-income clients. For a married couple filing a joint return, the phase-out range is a modified adjusted gross income of $150,000 to $170,000. For other taxpayers, the phase-out range is $75,000 to $95,000.

A client can claim the credit for a 2009 purchase on either the 2008 or 2009 return. Thus, a client can cash in on the credit by claiming the credit on an amended (or original) 2008 return or by amending his or her Form W-4 to reduce 2009 withholding.

Note. The IRS says a client cannot claim the credit in anticipation of a purchase that will take place by December 1. According to the IRS, until a purchase is finalized, which for most purchasers occurs at the time of the closing, the client does not qualify for the credit [First-Time Homebuyer Credit Questions and Answers at irs.gov]. Presumably this means that, not only is the client ineligible to file an amended 2008 return before the closing, he or she also cannot change Form W-4 prior to closing.

Sales Tax Deduction

A deduction is available for state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles between February 17, 2009 and December 31, 2009. The deduction is available regardless of whether a client itemizes deductions on Schedule A or claims the standard deduction and may be enough to qualify the client for an additional withholding allowance. The deduction is phased out for joint filers with modified adjusted gross income between $250,000 and $260,000 and other taxpayers with modified AGI between $125,000 and $135,000.

Reach Out to Clients

We have prepared a letter you can send to clients advising them on the importance of taking a fresh look at their W-4 forms. You can adapt the language as appropriate for your clients and their situations to send by mail or email.

The letter is in the form of Microsoft Word document. Download to your computer to save and modify as appropriate.

• Dear Client – Second Look at W4 (Word doc. 26 KB)

Other Resources

The IRS has also issued a revised Publication 919, How Do I Adjust My Tax Withholding, and has updated its online withholding calculator at irs.gov.

Terence M. Myers, J.D. and Dorinda D. DeScherer, J.D. are nationally renowned writers on tax topics for such publications as Accountants Tax Weekly, Tax Return Preparer's Letter, Nonprofit Tax and Financial Strategies, and Executive's Tax and Management Report. For many years Myers was Managing Editor and DeScherer Assistant Managing Editor for many Prentice Hall tax newsletters. Myers and DeScherer have published books and other publications with Harcourt Professional Publishing, Aspen Publishers, Prentice Hall, and the AICPA.

Last Updated: 06/18/2009