What Is a Withholding Allowance?

A withholdin🦩g allowance is an exemption th𒅌at reduces how much income an employer deducts from an employee’s paycheck for taxes and transmits to the Internal Revenue Service (IRS) on their behalf.

This exemption from withholding is tied to the personal exemption, a federal tax break that was available to all 🎉taxpayers, regardless of their expenses, through 2017.

The Tax Cuts and Jobs Act (TCJA) of 2017 eliminated 澳洲幸运5官方开奖结果体彩网:personal exemptions for the period from 2018 to 2025. As a result, the withholding allowance has no current practical relevance. But that could change after 2025, if the TCJA changes are not extended.

For now, it is no longer part of 澳洲幸运5官💦方𓆉开奖结果体彩网:Form W-4: Employee’s Withholding Certificate, which the IRS completely redesigned.

Employees in the United States fill out and submit Form W-4 to their employers so that their employers know how much to withhold from workers' paychecks.

How the Withholding Allowance Worked

Before 2018, an individual was required to 澳洲幸运5官方开奖结果体彩网:fill out Form W-4 when hired by an employer. The form required certain personal information, such as their name, 澳洲幸运5官方开奖结果体彩网:Social Security number, and the number of allowances to be claimed.

The employer used the W-4 to determine how much income to subtract from an employee’s paycheck and remit to the tax authorities.

The total number of allowances claimed was important—the more tax allowances claimed, the less income would be withheld from a paycheck; the fewer allowances claimed, the more income would be withheld.

The withholding amount was based on filing status—single or married but filing separately, married and filing jointly, or head of household—and the number of withholding allowances claimed on the W-4. 

It was important ♛to claim the right number of allowances to avoid paying too little in taxes or to keep from giving the government an interest-free loan by paying too much in taxes (only to receive the amoꦛunt back later as a refund).

Determining Withholding Post-2017

Much of how things worked before the passage of the TCJA is the same today. Individuals still fill out a W-4 which employers still use it to calculate how much income from an employee's paycheck to withhold. Tax filing status is still key.

But the IRS simplified Form W-4 and how taxpayers should determine their withholding. Now, withholding amounts relate to whether an individual has multiple jobs or a spouse who works, what credits they can claim, and other adjustments.

For example, withholding is affected if:

• A taxpayer can claim the 澳洲幸运5官方开奖结果体彩网:Child Tax Credit for a qualifying child (or a dependent who is not a qualifying child)
• They itemize personal deductions instead of claiming the 澳洲幸运5官方开奖结果体彩网:standard deduction
• They have additional income from dividends, interest, or retirement income
• They (or their spouse) have more than one job
  

Complete Exemption From Withholding

An individual can be completely exempt from withholding, but it’s not easy to receive that ♓status.

You can claim the exemption from withholding only if you had a right to a refund of all federal income tax withheld in the prior year because you didn’t have any tax liability and you expect the same for the current year. You simply write “Exempt” on Form W-4.

This must be done annually; the exemption doesn’t automat🎀ically carry over. 

When To Redetermine Withholding

A new Form W-4 must be filed with a taxpayer’s employer whenever the taxpayer's personal or financial situation changes (e.g., they get married, have a baby, or their spouse enters or leaves the workplace).

The new withholding goes into effect no later than the first payroll period ending 30 days after giving the revised form to the employer. The employer may implement it sooner but isn’t required to do so.

It’s also possible to request that an ad꧋ditional amount or a speciಌfic dollar amount be withheld in addition to other tax withholdings.

This may be helpful for taxpayers receiving a year-end bonus or for those who simply want to boost withholding near the end of the year (perhaps to cover taxes on 澳洲幸运5官方开奖结果体彩网:investment income, such as 澳洲幸运5官方开奖结果体彩网:capital gain distributions received at year-end).

What If Too Little Is Withheld?

The short answer: You are likely to owe money when you file your tax return. And if you have significantly 澳洲幸运5官方开奖结果体彩网:underpaid your taxes during the year, you may have to pay a penalty.

If you do not have enough withheld from your paycheck, you can request that your employer withhold an additional dollar sum.

If, on the other hand, you have more income withheld than you'll owe in taxes, you'll receive a refund after you file your annual income tax return.

Receiving a refund isn’t neces🧜sarily a good thing. It represents money you went witꦡhout during the year and that could have been invested for your future financial well-being or gone toward bills.

The Bottom Line

The withholding allowance reduced how much money an𝔍 employer withheld from employee paychecks for income taxes. Eliminat𒁏ed by an act of Congress in 2017, it could be reinstated if Congress fails to extend the TCJA tax cuts.

Nonetheless, it's important to ensure that your employer withholds the right amount of money from each paycheck to pay federal income taxes.

If you don't fill out Form W-4 carefully, you can get hit with a nasty tax bill out of the blue or essentially end up lending the IRS money free of charge.