Impact of New Tax Laws on W-2 Forms

Are you curious about how the latest tax laws might change your salary and taxes? Some insights can be found within the updated W-2 form for employees.

The IRS has recently released a draft of the new W-2 form. This will be used for calculating tax withholdings for each pay period. Although this draft won’t take effect until 2025, it does cover regulations on tips and overtime pay. Notably, the IRS plans to offer transition relief for those claiming deductions and for employers under new reporting requirements for the 2025 tax year.

The new W-2 form illustrates how recent laws regarding taxes and overtime on tips can be interpreted. So what can Americans anticipate when faced with these changes?

“We aim to provide comprehensive support for our clients,” stated Rob Burnette, an investment advisor representative at Outlook Financial Center and a professional tax return preparer.

Changes in the W-2 Form

One significant alteration is in box 14. Following the tax legislation, box 14 will now be divided into 14a and 14b.

• Box 14A: According to Burnette, this will likely function as before. Employers will report items that don’t fit elsewhere, like state disability insurance tax, union membership fees, and health insurance premiums.
• Box 14b: This is labeled “Treasury Talent Occupation Code” for those not subject to tax on tips. The IRS plans to publish a list of qualifying professions by October for those “Conventionally and Regularly (Received) Tips” before December 31, 2024.

Box 12 remains unchanged, but a notable aspect of the new tax bill introduces three new codes.

• TA – Refers to employer contributions to accounts for children, allowing a limit of $5,000 annually adjusted for inflation. Employers may contribute up to $2,500, which is not taxable.
• TP – The total eligible tips for tax deductions can reach a maximum of $25,000 per individual from 2025 to 2028. Note that self-employed individuals can only deduct based on their net profit where tips were earned, factoring in adjusted gross income changes over $150,000 ($300,000 for joint filers).
• TT – Overtime salaries eligible for no tax deductions through 2028 will allow an annual deduction cap of $12,500 ($25,000 for joint filers), subject to the same income thresholds.

Changes to Other Forms

The W-4 form is also getting some makeovers. It will now contain new deductions and expand from 3 to 4 pages.

Step 4 (b) includes deductions for:

• Qualified tip income (up to $25,000)
• Overtime compensation (up to $12,500, or $25,000 for married couples)
• New car loan interest (up to $10,000)
• Additional amounts for seniors (65+) – $6,000 each, with a $65,000 cap if the spouse is also over 65)
• Cash gifts to charities, such as up to $1,000 ($2,000 if married)

Instead of strictly itemized deductions, the form will also include:

• Medical or dental expenses exceeding 7.5% of adjusted gross income, defined as “income” based on AGI.
• State and local taxes up to $40,400 (indexed for inflation by 2026).
• Mortgage interest.
• Charitable gifts exceeding 0.5% of AGI.
• Standard discard/limited mathematics at the worksheet’s end may affect the numbers.

Upcoming Forms

A new Schedule 1-A will be linked to Form 1040, aimed at illustrating deductions related to the new W-2 codes and W-4 deductions in Box 12.

What This Means for Taxpayers

“If you’re preparing your own taxes, take your time with the new regulations and ensure you adhere to the guidelines,” Burnette advised. “If you’re unsure, it might be best to consult with a professional tax preparer. If your situation isn’t too complex, DIY tax software or even a paper return could work,” although additional recommendations may vary.