The Tax Cuts and Jobs Act (TCJA) became law in late 2017 and significantly changed how the federal income tax system works. The TCJA made several changes, including
- removing personal exemptions
- increasing the standard deduction
- making the child tax credit available to more people
However, the new tax changes don't always work well with the previous version of Form W-4.
- The older version relied on calculating a number of allowances that were then used, along with any additional withholding amount desired, to figure out how much federal income tax to withhold from your paycheck.
- The allowance system was tied to the use of exemptions and deductions on your tax return.
When these exemptions deductions were removed in the Tax Cuts and Jobs Act, the Form W-4 no longer estimated the correct amount that needed to be withheld from paychecks as well as it used to.
The first step the IRS implemented was to change the withholding tables. Employers use these tables along with the information on your Form W-4 to calculate federal income tax withholding.
Thus, you can no longer claim "zero" exemptions as that does not exist anymore. That is why the W-4 calculator is such a great tool.
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