A withholding allowance is an exemption that reduces how much income tax an employer deducts from an employee’s paycheck. The number of withholding allowances an employee can claim depends on their personal circumstances, such as whether they can claim the Child Tax Credit for a qualifying child, whether they itemize personal deductions instead of claiming the standard deduction, whether they or their spouse has more than one job, and what their total income is. The more withholding allowances an employee claims, the less income tax will be deducted from their paycheck, and vice versa.
The IRS Form W-4 is used to determine the number of withholding allowances an employee can claim. The form has been updated in recent years to reflect changes in tax laws, and the latest version reduces the number of sections on the form from seven to five. The new form no longer allows for personal or dependency allowances, though other types of allowances remain.
It is also possible for employees to request that a specific dollar amount be withheld, regardless of withholding allowances. This may be helpful for taxpayers receiving a year-end bonus or for those who want to boost withholding near the end of the year to cover taxes on investment income, such as capital gain distributions made at the end of the year.
Ultimately, the number of withholding allowances an employee claims depends on their tax strategy and whether they need to take more tax out of their check or they need more monthly income. It is a personal choice with no exact answer.
