Withholding Allowances

The term has got nothing to do with allowances that are paid by the employer. These allowances are basically tax compliance that are imposed by the Internal Revenue Service of the United States and are adhered to by employees and employers. When we talk about withholding allowances, the IRS Form W-4 largely comes into the picture, and so does the employers and employees duty of filing the W-4 form.

Definition

The age-old tax evasion and tax non-payment offense is often curbed by the practice of deduct at source compliance. These compliance are very simple and logical. The employer deducts some specified amounts from your salary and pays it to the government's taxation department on your behalf. Two prominent taxes that are deducted by the employer are payroll tax and income tax. The government uses the payroll taxes for the purpose of social security and medicare, while the income tax is forwarded to the IRS. Though the income tax is deducted as a percentage of your earnings, which by default increases with an increase in income, irrespective of your current tax liability. However, the burden of tax can be reduced with the help of these allowances.

A withholding allowance is basically claimed in the Form W-4 that is generated by your employer. You may be the only earning member of your family, or you may be supporting your parents, financing the education of your children or supporting a close relative. With the help of W-4 you will be able to claim allowances, which will reduce your tax liability of withheld taxes. It basically means that after you claim the allowances, the said amount will not be deducted from withholding taxes by your employer.

Withholding Allowances Explained

A careful look at taxation regulations will show you that there are some really good allowances that one can claim. Here's a small list.

• The prominent one is the head of the house allowance, where a single tax payer who pays more than 50% of the household costs can qualify for such an allowance.
• Health care expenses for offspring, education tax credit, foreign tax credit, adoption credit are some qualifying points for conversion of tax credits into an allowance.
• If you are working for only one employer then there is a common allowance that is known as single employer withholding allowance that you can claim.
• There are also provisions where you can claim an allowance 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 an allowance for each of your offspring, but again you will have to confirm the qualifying conditions.

A twist to the tale that is worth mentioning is that if a tax payer claims more than nine allowances, his employer can rightfully and lawfully send the Form W-4 for an IRS review. On the whole, the logic is better the combination of allowances, lesser is the tax withholding, and you will end up saving quite a sum of money. As a cautionary tip let me recommend you to go through the W-4 very carefully. It is necessary that you confirm all the qualifying conditions before you file a claim for an allowance. It would be also great if you refer to the IRS withholding calculator, regulations and qualifications before you fill the form. It must be noted that IRS can penalize wrongful filings (irrespective of the fact that they are intentional or unintentional).