Reg. § 31.3402(m)-1 Additional withholding allowance.
(a) In general In determining the withholding allowance or additional reductions in withholding under section on employee withholding allowance certificates furnished to the employer to be effective on or after January 1, 2020, employees may take into account the estimated tax deductions described in of this section, the estimated tax credits described in of this section, and estimated tax payments described in of this section. Employees may only claim items in , , and of this section to the extent provided in of this section.
(b) Estimated tax deductions Employees may take into account the following income tax deductions in chapter 1 of the Code:
(1) Estimated itemized deductions (as defined in section ) allowable under chapter 1;
(2) Estimated deductions described in section , except for—
(i) Any deduction described in section ;
(ii) Any deduction described in section if the reimbursement or payment for the amount allowable as such deduction is excludable from wages subject to income tax withholding;
(iii) Any deduction described in section ;
(iv) Any deduction described in section ; and
(v) Any deduction described in section ;
(3) Estimated deductions for net operating loss carryovers under section ;
(4) The estimated aggregate net losses from schedules C (Profit or Loss from Business), D (Capital Gains and Losses), E (Supplemental Income and Loss), and F (Profit or Loss from Farming) of Form 1040 and from the last line of Part II of Form 4797 (Sale of Business Property);
(5) Estimated additional standard deduction for the aged and blind provided under section and section ;
(6) Estimated deduction allowed under section ; and
(7) Estimated deduction or deductions allowed under section .
(c) Estimated tax credits Employees may take into account the estimated income tax credits allowable under chapter 1, except for—
(1) The credit under section for taxes withheld under chapter 24 of the Code (which includes taxes withheld on wages and amounts treated as wages for chapter 24 purposes, such as pension withholding under section and backup withholding under section ) unless, on the day the employee estimates this amount, the amount has been actually withheld from the employee's wages (or another payment treated as wages for this purpose), the employee enters this amount of tax withheld pursuant to the instructions in the Tax Withholding Estimator (or successor) or Publication 505 (or successor), and the employee is not an employee whose employer must withhold for that employee pursuant to a notice under ;
(2) The credit for tax withheld at source for nonresident aliens and foreign corporations under section ; and
(3) Any credit to the extent that the employee has filed or expects to file any IRS form claiming such credit other than the employee's United States Individual Income Tax Return (Form 1040).
(d) Estimated tax payments Employees may take into account estimated tax payments only if—
(1) The employee's employer is not obligated to withhold on the employee's wages pursuant to a notice under ;
(2) The amount claimed has been paid with the payment voucher from Form 1040-ES (or was otherwise designated by the taxpayer as a payment of estimated tax) or is planned to be made with respect to nonwage items but only if the planned amount does not decrease withholding below the pro-rata share of chapter 1 tax attributable to wages as determined under forms, instructions, publications, and other guidance prescribed by the Commissioner;
(3) The employee uses the Tax Withholding Estimator (or successor) or Publication 505 (or successor) and enters the amount claimed pursuant to the instructions in the Tax Withholding Estimator (or successor) or Publication 505 (or successor); and
(4) In using the Tax Withholding Estimator (or successor) or Publication 505 (or successor), the employee includes all items of nonwage income the Tax Withholding Estimator (or successor) or Publication 505 (or successor) prompts or instructs the employee to enter or include.
(e) Definitions and special rules
(1) Estimated The term “estimated” as used in this section to modify the terms “deduction,” “deductions,” “credits,” “losses,” and “amount of decrease” means with respect to an employee the aggregate dollar amount of a particular item that the employee reasonably expects will be allowable to the employee on the employee's income tax return for the estimation year under the section of the Code specified for each item. In no event shall that amount exceed the sum of:
(i) The amount shown for that particular item on the income tax return that the employee has filed for the taxable year preceding the estimation year (or, if such return has not yet been filed, then the income tax return that the employee filed for the taxable year preceding such year), which amount the employee also reasonably expects to show on the income tax return for the estimation year; plus
(ii) The determinable additional amounts (as defined in of this section) for each item for the estimation year.
(iii) The determinable additional amounts are amounts that are not included in of this section and that are demonstrably attributable to identifiable events during the estimation year or the preceding year. Amounts are demonstrably attributable to identifiable events if they relate to payments already made during the estimation year, to binding obligations to make payments (including the payment of taxes) during the year, and to other transactions or occurrences, the implementation of which has begun and is verifiable at the time the employee furnishes a withholding allowance certificate. The estimation year is the taxable year including the day on which the employee furnishes the withholding allowance certificate to the employer, except that if the employee furnishes the withholding allowance certificate to the employer and specifies on the certificate that the certificate is not to take effect until a specified future date, the estimation year shall be the taxable year including that specified future date. It is not reasonable for an employee to include in his or her withholding computation for the estimation year any amount that is shown for a particular item on the income tax return that the employee has filed for the taxable year preceding the estimation year (or, if such return has not yet been filed, then the income tax return that the employee filed for the taxable year preceding such year) and that has been disallowed by the Service as part of an adjustment described in (relating to examination and determination of tax liability) and through (relating to examination of returns), without regard to any pending request for reconsideration, protest, request for consideration by an Appeals office, or civil action in which such proposed adjustment is at issue.
(2) Restriction for employees with nonwage income The employee must offset any deduction described in of this section with items includible in the employee's gross income for which no Federal income tax is withheld in accordance with forms, instructions, publications, and other guidance prescribed by the Commissioner. In addition, an employee whose employer must withhold for that employee pursuant to a notice under must offset any tax benefit resulting from any deduction or credit described in or of this section with the anticipated income tax attributable to items other than wages includible in the employee's gross income in the manner determined by the Commissioner.
(3) Multiple withholding allowance certificates
(i) In general The employee may not take into account deductions, credits, or estimated tax payments described in , , or of this section if these deductions, credits, or estimated tax payments are claimed on another valid withholding allowance certificate in effect with respect to another employer of the employee or any employer of the employee's spouse.
(ii) Married taxpayers filing jointly Married taxpayers who reasonably expect to file as married filing jointly on their Federal income tax return for the estimation year determine the withholding allowance to which they are entitled under section on the basis of their combined wages, allowable credits or deductions, and estimated tax payments permitted to be taken into account. The deductions, credits, or estimated tax payments described in , , and of this section to which either spouse is entitled may be claimed by either spouse or may be allocated between both spouses. However, one spouse may not claim deductions, credits, or estimated tax payments described in , , and of this section claimed on the other spouse's withholding allowance certificate.
(iii) Married taxpayers filing separately A married taxpayer who reasonably expects to file a separate income tax return from the employee's spouse for the estimation year determines the withholding allowance deductions, credits, or estimated tax payments described in , , and of this section on the basis of the employee's individual wages, deductions, credits, and estimated tax payments.
(4) IRS instructions An employee must follow the instructions to the Form W-4, and other IRS forms, instructions, publications, and related guidance in determining the employee's withholding allowance or other reductions in withholding permitted under section for deductions, credits, or estimated tax payments described in , , and of this section.
(f) Applicability date The provisions of this section apply on or after October 6, 2020. Taxpayers may choose to apply paragraphs (a)(2) and (3) this section on or after January 1, 2020 and before October 6, 2020. For rules that apply before October 6, 2020, see 26 CFR part 31, revised as of April 1, 2020.
[T.D. 9924, 85 FR 63034, Oct. 6, 2020]