Withholding Allowance

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DEFINITION of 'Withholding Allowance'

Employee-claimed exemptions on the tax form employers use to determine how much of an employee’s pay to subtract from his or her paycheck to remit to the tax authorities. The more allowances you claim, the less income tax will be withheld from your paycheck. The fewer allowances you claim, the more income tax will be withheld from each paycheck. In the United States, taxpayers use form W-4 to calculate and claim their withholding allowance.

INVESTOPEDIA EXPLAINS 'Withholding Allowance'

If you claim more allowances than you should have, you will owe money at tax time. If claiming too much allowances results in you significantly underpaying your taxes during the course of the year, you may have to pay a penalty when you file your annual tax return. If, after claiming zero allowances, you find that you do not have enough withheld from your paycheck, you can request that your employer withhold an additional dollar sum.

If you have more withheld than you should, you will receive a refund after you file your annual income tax return. Receiving a refund isn’t necessarily a good thing, though, as it represents money you could have been using throughout the year to pay your bills or invest. The government doesn’t pay interest on the balance when you have too much withheld.

The IRS provides a rough formula for how many allowances taxpayers should claim to have the correct amount withheld from each paycheck. You can claim one allowance for yourself, one for your spouse and one for each of your dependents. When your personal or financial situation changes (for example, you get married, take out a mortgage, or get a second job), you should recalculate your withholding allowance and submit a new form W-4 to your employer. If you don’t submit IRS form W-4 to your employer showing how many allowances you want to claim, your employer will assume that this number is zero, and you’ll have the maximum amount of income tax withheld from each paycheck.

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