What is a Withholding Allowance?
A withholding allowance is a claim that someone can make to reduce the amount of money withheld from his or her paychecks. Employers are required to withhold some funds from each paycheck and submit these funds to tax agencies. At the end of the year, employees sit down to do their income taxes and determine how much they owe. The money withheld from the paychecks is applied to the total tax bill, and in some cases the employee may end up with a refund because too much was withheld, while in others, the employee may have a balance due.
In the United States, employees file withholding allowances on a Form W-4, a form that is usually provided by the employer. People are allowed to claim themselves as a withholding allowance, if they are not being claimed by anyone else, and dependents can be claimed as well. Allowances are also available for the heads of household and people in certain other circumstances.
The more withholding allowances a taxpayer claims, the less the employer will withhold from each paycheck. This results in more money coming into the household every month. However, it can also put employees at risk of having a balance due when they do their taxes. If people do not claim enough holding allowances, on the other hand, too much will be withheld and they will have to wait for a refund at the end of the year.
People who notice that they get big refunds every year may want to consider filing a new Form W-4 with updated withholding allowance information so that they get more money in their monthly paychecks. On the other end of the scale, people who owe money each year and struggle to pay it could opt to update their W-4s with fewer withholding allowances so that they will not be stuck with a big tax bill every April.
The allowances claimed on the Form W-4 do not have to match those claimed on a tax return. Some people use the withholding allowance as a money management strategy. They may not file any allowances so that they can anticipate a big refund when they file their taxes, for example, or they may claim every possible withholding allowance and invest that money over the course of the year. This allows them to earn money while also setting funds aside to pay taxes, although taxpayers should be careful because they can be penalized for underwithholding. An accountant can provide advice about withholding allowances for someone who is not sure about how to proceed.
Every year I use an online withholding allowance calculator to get a good idea of how much I should have withheld from every paycheck. Usually this stays pretty consistent, but I like to monitor it and make sure I am not over or under paying.
In some situations it would probably be wise to check with an accountant, but for me this has always given me the information I needed.
My daughter always plans on taking a trip every year when she gets her tax refund. This way she doesn't have to try and save for it through the year. I would rather have more money coming in every month instead of receiving a large amount of money at once.
When someone is filling out a W-4 withholding allowance form for the first time, it can be confusing to know what to put down. I know when my son started working at his first job after college, he wanted to make sure he didn't owe money when it came time to file his taxes.
If you get a big refund check back every year, it is tempting to change your withholding allowance so you get more money in your pocket all year long.
I know some people who aren't very good about saving money though, and they look forward to their tax refund every year. They will usually use this to make a big purchase that they wouldn't have the cash to do this with otherwise.
One year my son decided to change his withholding tax allowance so he could get back the maximum amount of money every month. His plan was to invest this extra money and use the money throughout the year instead of getting a large amount of money all at once.
He is single and doesn't have to worry about supporting any kids, and he didn't want the government holding on to that money all year long. I don't think he checked with a tax accountant before he did this.
When it came time to do his taxes, he ended up owing more money than he thought he would. He was hoping it would come out a little bit more even than it did. He ended up changing his withholding allowance again, so he wouldn't owe so much money the next year.
There often seems to be a fine line between having enough money withheld from my paycheck and having too much money withheld. It is kind of nice to get a tax refund every year, but sometimes that extra money would come in handy during the year.
I didn't realize that the numbers filled out on a W-4 did not have to match up with the numbers on a tax return. This does make sense, and I find it interesting that some people will use this as a strategy for managing money.
I just plan on receiving a decent tax refund and would be really upset if I found out I owed a bunch of money instead of getting some back.
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