Page 2 of Form W-4/W-4P contains the "Deductions and
Adjustments Worksheet", where allowances are adjusted for itemized deductions or
credits the taxpayer may be claiming. Lines 1 thru 3 of the
worksheet increases allowances by the amount itemized deductions exceeds
the standard deduction. Line 4 includes an estimate of the adjustments to
income. (Such as IRA deduction, 1/2 SE tax, etc).
Line 5 is where estimated credits are included. Since credits
are a direct reduction to tax, as opposed to deductions, which reduce taxable
income, credits must be converted to an equivalent amount of deductions to be
included in the W-4 calculation. This is done on IRS publication 919, worksheet
8. The program generates worksheet 8, and includes the results on line 5 of page
2.
The total of itemized deductions in excess of standard
deduction and credits converted to deductions is then reduced by income not
subject to withholding. This result is divided by the personal exemption amount
to derive additional allowances, if any, to claim on form W-4.
In computing W-4 page 2, the starting point for each of the
above mentioned amounts is the amount on the current year return. These amounts
can be adjusted by making entries in screen 7.1 "2019 Estimates (1040 ES)". For
example, assume the taxpayer did not make any charitable contributions in the
current year, but plans to contribute $2,000 in cash to Goodwill next year. This
can be included on the W-4 worksheets by going into screen 7.1, and entering
"2,000" in "50% Limitation [A] – gifts to charity" (Screen 7.1 "2019 Estimates",
code 70).
Adoption credits are assumed to be a one year event, so are
not automatically included in the W4 worksheet. If credits need to be adjusted
on the W-4, an adjusting entry can be made in "Credits [A]" (Screen 7.2
"Withholding Allowance Certificate", code 43)
