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Allowance is a tax term you need to understand. Bankrate explains.

What is an allowance?

withholding allowance is a declaration on a tax form setting how much should be withheld from a paycheck for income taxes. Too few withholding allowances may result in excess funds remitted to the Internal Revenue Service (IRS), earning the taxpayer a refund; too many allowances may mean not enough funds are remitted to the IRS, requiring the taxpayer to make up the difference when filing at the end of the tax year.

Deeper definition

The exact amount that employers are expected to withhold from each paycheck to pay income taxes takes into account whether the employee is filing as a single person, married person, or head of household. Employees submit IRS form W-4 to their employers itemizing the number of allowances they wish to claim; if they do not submit a W-4, employers assume they are claiming zero allowances and they want the maximum amount of income tax withheld from each paycheck.

A taxpayer may declare one withholding allowance for herself, one for her spouse, and one for each of her children and other dependents. The amount of each allowance and how it affects a taxpayer’s salary is based on her tax bracket and how often she receives a paycheck. If a taxpayer is filing as a single person, living on his own with one job and no dependents, then the total number of allowances he can claim is two.

A taxpayer with dependents will have more detailed tax forms. There’s an option to include additional allowances for being the head of the household, claiming the child tax credit, or using a credit for childcare expenditures. A taxpayer can declare an allowance for each of his qualified dependents.

Need help figuring out how many withholding allowances to claim? Check out Bankrate’s tax calculators.

Allowance example

Daisy is married, her spouse has a job, they have no children, and they both have jobs. Daisy and her spouse file separately and claim one withholding allowance each. Claiming two allowances is optional, but less tax will be withheld from their paychecks.

If Daisy and her spouse file jointly, she can decide how many allowances to claim based on which spouse earns more and which earns less. The couple may file jointly, combine their incomes, and file a single tax form. Alternatively, if Daisy is working and her spouse is not working, they may claim two allowances.

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