You can no longer claim allowances on a Form W-4 – the form changed in 2020. You can still reduce the amount of taxes withheld from your paycheck by claiming dependents or other deductions, explains TurboTax.
Reviewing the changes to the W-4 and learning whether or not you need to update yours will help you make sure you don't underpay or overpay your taxes each year.
Read More: Form W-4: What It Is, How to Fill It Out and Other W-4 Questions Answered
What Is a W-4?
Employees (unlike contractors or freelancers) fill out a W-4 when they begin to work for an employer. This form tells an employer how much money they should take out of each paycheck so they can submit the correct amount of taxes to your state and the IRS for you.
Using the information from your W-4 and your payroll records, your employer will issue you a Form W-2 to help you prepare your taxes. A W-2 shows you the amount of income you earned and the deductions that were made. Your employer should get your W-2 to you by January 31.
If you are self-employed and/or receive other types of non-employee income, you might receive a Form 1099. This shows the amount of money you were paid by the issuer. These issuers do not withhold any taxes from your payments, but they do file a report to the IRS showing the money they paid you.
Read More: Choosing Head of Household When Filing Your Taxes
What Changed in 2020?
In 2020, the IRS updated Form W-4 to, among other things, eliminate allowances. Allowances allowed you to reduce your tax withholding. For example, if you were single and had no extra income besides your salary, you could claim one allowance (yourself) to reduce the amount of money taken out of each paycheck.
If you were going to earn extra money (from a source besides your employer) and didn't want to take a chance on underpaying your taxes during the year, you could claim zero allowances. This would result in your employer withholding more from your taxes. If you claimed zero exemptions and overpaid your taxes for the year, you'd get a refund.
Starting in 2020, instead of allowances, you can claim certain deductions or claim qualifying dependents. Qualifying dependents are certain family members for whom you pay more than 50 percent of their expenses. Family members who qualify include minor children or disabled or ill parents.
If you are divorced, only one parent can claim these family members as dependents. Review the IRS website page to see who qualifies.
Read More: What's Different About the 2021 Child Tax Credit?
Do You Need to Update?
If you filled out a W-4 prior to 2020 and you're working for the same employer, you don't need to update this form. If your life situation has changed (for example, if you got married, got divorced, had more children or your children became adults), you can update your W-4 to have more or less in taxes taken out of your paychecks.
Check with your tax preparer or your HR department to see if you need to update your W-4. You will need to pay specific attention to Step 3, which is where you claim dependents.