Form W-4 Step 3; What Does It Want?

When the IRS released the 2020 Form W-4, Step 3 was titled “Claim Dependents.” The 2023 Form W-4 titles Step 3 as “Claim Dependents and Other Credits.” A question many employees and payroll professionals had beginning with the release of the 2020 Form W-4 was what are acceptable entries for Step 3 from the IRS’s perspective (see Payroll Currently, Issue 1, Vol. 31)?

On February 19, 2023, the IRS issued Tax Tip 2023-22, “Understanding the Credit for Other Dependents,” as a way to clarify the acceptable entries into Form W-4’s Step 3.

When using Form W-4’s Step 3 to calculate an employee’s federal income tax withholding, the following tax credits can be entered in Step 3:

• Child Tax Credit—up to $2,000 for each child under age 17 depending on income level
• Child and Dependent Care Credit for Other Dependents—up to $500 for each non-child dependent depending on income level
• Earned Income Tax Credit
• American Opportunity Credit and Lifetime Learning Credit
• Adoption Credit
• Saver’s Credit (Retirement Savings Contributions Credit)
• Foreign Tax Credit
• Residential Energy Credits
• Clean and Electric Vehicle Credits
• Health Care Premium Tax Credit

Form W-4’s instructions since 2020 have included the following statement:

“You can also include other tax credits in this step, such as education tax credits and the foreign tax credit.”

IRS Tax Tip 2023-22 explains the conditions that must be met to claim the $500 “Credit for Other Dependents” on Form W-4 Step 3 by multiplying the number of other dependents by $500. In a similar manner, the “Child Tax Credit” can be claimed on Form W-4 Step 3 by multiplying the number of dependents who are under the age of 17 by $2,000.

In addition, the 2023 Form W-4 added the following statement to Step 3:

“You may add to this the amount of any other credits.”

With the 2023 changes to the title of Form W-4’s Step 3 to “Claim Dependent and Other Credits,” along with the addition of the statement to Step 3: “You may add to this the amount of any other credits,” Form W-4 recognizes the statement found in the instructions since 2020 allowing any of the available tax credits to be included in Step 3 and be used in the calculation of federal income tax withholding. Even though the IRS did not add a line to Step 3 for other credits, the amount of credits other than the “Child Tax Credit” and “Child and Dependent Care Credit for Other Dependents” may be included in the total entered in Step 3. In other words, the amounts entered in the first two lines on Form W-4’s Step 3 do not need to be the amount of the total credits entered in Step 3.

The credit begins to phase out when the taxpayer’s income is more than $200,000 or $400,000 if married filing jointly. The taxpayer must also claim the person as a dependent on their tax return. A dependent being claimed as an “other dependent” cannot also be claimed as a dependent for the child tax credit or additional child tax credit.

Jim Medlock, CPP, is a Payroll Compliance Educator at Medlock & Associates and the former Education Advisor for PayrollOrg, where he served for 26 years. He received an APA Team Member Legend award in 2018 and was named Payroll Man of the Year in 1991.