The IRS is rolling out a new W-4: What you need to know

The Internal Revenue Service has announced its intention to roll out a new W-4 form soon — and it might mean huge headaches for the millions of working Americans who use the form to determine how much of their pay should be withheld to pay their federal income taxes.

Pretty much whenever you start a new job, you’re required to fill out a Form W-4, officially the “Employee’s Withholding Allowance Certificate.”

Here’s what you need to know about the proposed new W-4…

Proposed new W-4 tax withholding form is a lot more complicated

Why do I have to fill out a W-4 form?

The W-4 lets your employer know how much of what you earn for your work they should withhold to pay the federal taxes on your wages.

If you fill out the form correctly, ideally you should neither owe too much nor get a huge refund when you file your taxes for the prior year.

The form has remained pretty much unchanged for quite some time, but the IRS now says it intends to have an updated, more complex form for the year 2020.

How will the new W-4 form differ from the current one?

Take a look at the current W-4 form (which will probably look familiar if you’ve had a job any time recently) and the proposed new form. Keep in mind that the proposed form below could change before it is officially released:

As you can see, the proposed form is quite a bit longer than the existing one and contains a lot more information, even though the IRS said in its release about the changes that “The primary goals of the new design are to provide simplicity, accuracy and privacy for employees while minimizing burden for employers and payroll processors.”

But the length of the form isn’t the biggest difference: Allowances are going away.

Currently, you are asked to fill out a worksheet which gives you a number of allowances to fill in. Allowances are exemptions that reduce the amount of tax your employer withholds. The more allowances you have, the more of your pay you actually take home.

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On the proposed new form, you’ll be asked to fill in dollar amounts for:

• Income from other jobs in the household
• Expected income tax credits
• Itemized and other deductions
• Non-wage income like interest, dividends and retirement income

As USA Today puts it, “Filling out the new form will be a lot like doing your taxes again.”

How often do I have to fill the W-4 out?

While the new form will undoubtedly be more complicated, it should mean that that withholding amounts will be a lot more accurate. Money expert Clark Howard says that’s a good thing when mid-April rolls around:

“I’d prefer that you get no refund at all. If you are getting one, it means that you’ve made an interest-free loan to the government and your money has been working for them — not you — all year long.”

So, because of that improved accuracy it will likely be beneficial for you to fill out a new W-4 — as painful as it might be — every year or so since your financial situation is likely to change over time.

Final thought

With all of this said, it’s remotely possible that these proposed changes don’t see the light of day any time soon. The new form was slated to be rolled out this year, but the sample was met with concern from tax and payroll professionals.

The IRS announced that is was taking comments on the proposed design until July 1, so they’re likely processing all of that information now. Team Clark will keep you up to date on everything when and if it becomes official.

Listen to Clark talk about the upcoming changes to the W-4 form here.

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Ask Clark: What should you do when your term life insurance rates skyrocket?

When consumers have financial problems in their lives, they turn to a trusted source for information like Clark.com.

Such was the case with this Twitter user who wanted advice on how to handle a sudden spike in his term life insurance premium.

@ClarkHoward I have a term life insurance policy and am 72 years old. The premium went from $142/mo to $675/mo and I just received notice that it is going to $1200/mo in Sept. What other options are available?

— Larry Winn (@LrwinWinn) July 24, 2018

Term life insurance premium too high? Consider this

If you’re heard Clark talk about life insurance, you know that he recommends level term life insurance. The beauty of level term life insurance is that you pay one fixed rate for the entire life (aka the term) of the policy. And the cost never goes up!

But level term life is a relatively new development in the insurance world. If you bought your policy years ago, you might be in a term life policy that’s not “guaranteed level.”

Understanding annual renewable term vs. guaranteed level

There’s something in the world of insurance called annual renewable term (ART). An ART policy covers you for one year. At the end of the year, you can renew the ART policy for another 365 days — usually at a slightly higher premium.

The thing about ART is that it tends to offer a lower premium during the first couple years than you would get with a guaranteed level policy. So it’s easy to look at quotes for the two different flavors of term life policies and think you’re making the smart choice by going with an ART.

By the way, if you have access to a group life insurance policy through your employer, ART is usually what you’re offered. You can think of it almost like buying a homeowners insurance policy a year at a time — except that it’s on your life, not your home.

But here’s the thing: Because ART policies will become more expensive as time goes on, they’re only recommended when you have a short-term need for life insurance. Otherwise, you want to lock in with a guaranteed level term policy, as Clark advises.

Wondering about the specifics of when an ART might be the right choice in your life?

Insurance site Haven gives the example of a smoker applying for life insurance who wants to quit but isn’t quite there yet. This hypothetical customer could probably get a lower rate with an ART policy for the first year versus a level-term policy for which they would underwrite and get locked in with higher rates as a tobacco user.

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If they opt for the ART, they could spend that first year working on kicking the habit. Once our smoker has quit for good, he or she could likely get a better deal on a guaranteed level policy as a non-smoker instead of continuing on as an ART customer.

So it appears that the Twitter user who wrote into Clark above likely has term life that is not guaranteed level, but rather annual renewable term.

Here’s another factor driving up his rate: The poster notes that his age is 72. Because he’s above 70, the actuarial tables insurers use to set rate are working against him big-time with an ART policy.

Think about it: It stands to reason there’s a greater rate of mortality after age 70 than, say, before age 30 or 40. And a higher cost follows when you have higher risk. So that also explains the steady uptick in price over the last term from $142/month to $675/month, and now the enormous 77% jump to $1200/month that he’s facing.

Now that we know the likely reasons why the poster’s policy is going up, what should he do about it?

Here are Clark’s recommendations

When we spoke with Clark Howard about the poster’s situation, the money expert had a couple of thoughts:

Based on what the poster told us, Clark thinks the man was probably in a guaranteed-level term policy that ran through age 70. Then once he hit 70, it came to an end and switched to annual renewable term from that point on.

But there’s a bigger question here: Is there still an insurable need for this insurance?

The answer is likely not. You get insurance for replacement of income to support your dependents in the event of your death. At 72, it’s less likely there are dependents to support to begin with. So that may negate the need for a policy in the first place and he can stop paying on it.

However, let’s play devil’s advocate and say there is an ongoing insurable need even at age 72. In that case, the best solution would be to shop the marketplace. There may be another insurer who offers a better deal on ART.

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Shopping is easy on the internet. You can comparison shop for new quotes at any of a number of sites below, which we’ve listed alphabetically:

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