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What are Withholding Allowances?

What are Withholding Allowances?
A method to lawfully reduce the amount of payable tax is by claiming for a withholding allowance. Here, a comprehensive explanation of the term, and the provisions under which one can claim this benefit, is explained.
Scholasticus K
A withholding allowance is basically a tax compliance that is imposed by the Internal Revenue Service (IRS) of the United States, and is adhered to by the employees and employers. To file for this compliance, they need to fill a W-4, which is an IRS Form.

How it Works
The employer deducts a specified amount from the employee's salary, and sends it to the government's taxation department on his behalf. Two prominent taxes that are deducted from it are, the payroll and income tax. The government uses the payroll tax for the purpose of social security and medicare, while the income tax is forwarded to the IRS. Income tax is deducted as a percentage of the employee's earnings, which by default increases with an increase in his income, irrespective of his current tax liability. Tax evasions or tax non-payment offenses are often curbed by this practice of deduction at source

However, the burden of tax can be reduced with the help of this benefit. The employee may be the only earning member of his family, or he may be supporting his parents, financing the education of his children, or supporting a close relative. With the help of W-4, he will be able to claim allowances, which will reduce his tax liability from the withheld amount.

A careful look at tax regulations will reveal that there are some really good benefits that one can claim.
  • A prominent one is the head of the house tax bracket, where a single tax payer who pays more than 50% of the household costs can qualify for a tax relief.
  • Health care expenses for offspring, education tax credit, foreign tax credit, and adoption credit, are some qualifying points for the conversion of tax credits into relief.
  • If you are working for only one employer, then there is a common benefit known as, the 'single employer withholding allowance', which can be claimed.
  • Also, there are provisions where you can claim a tax relief for your spouse. However, there are some stringent conditions, such as, your spouse's employment status, claim over withholding allowance from her employer, etc., that you will need to check upon.
  • You can also claim benefits for each of your offspring, but again, you will have to confirm the qualifying conditions.
However, if a tax payer files a claim for more than nine allowances, his employer can rightfully and lawfully send his W-4 for a review to the IRS.

Finally, more the tax relieved, less is the tax withheld, hence, you end up saving quite an amount of money. As a cautionary tip: go through the W-4 very carefully, and confirm all the qualifying conditions before filing a claim. Also, refer to the IRS regulations and qualifications before you fill the form. It must be noted that the IRS can penalize wrongful filings (irrespective of the fact that they were intentional or unintentional).