what is withholding allowance

A withholding allowance is an exemption that reduces the amount of income tax an employer deducts from an employee’s paycheck and sends to the IRS. Before 2018, employees could claim a number of withholding allowances on IRS Form W-4, such as for themselves, their spouse, and dependents, which lowered the amount of tax withheld from each paycheck. The more allowances claimed, the less federal income tax was withheld. However, the Tax Cuts and Jobs Act (TCJA) of 2017 eliminated personal exemptions from 2018 through 2025, effectively ending the traditional withholding allowance system. The IRS redesigned Form W-4 in 2020, removing the allowance concept and replacing it with a simpler form focused on filing status, dependents, multiple jobs, and other income adjustments to better calculate withholding. So, while withholding allowances historically helped determine how much tax an employer withheld from paychecks, they are no longer used in current IRS withholding calculations. But the general principle remains: the information you provide on Form W-4 guides your employer on how much tax to withhold to avoid owing money or overpaying tax at the end of the year. If legislation changes after 2025, withholding allowances might be reinstated, but as of now, withholding depends on the updated Form W-4 process.