A withholding allowance is an exemption that reduces how much income tax an employer deducts from an employees paycheck. The employee fills out Form W-4 to indicate the number of allowances they are claiming. The more allowances claimed, the less income tax will be withheld from a paycheck; the fewer allowances claimed, the more tax will be withheld. The amount of withholding is based on filing status (single, married but filing separately, married and filing jointly, or head of household) and the number of withholding allowances claimed on the W-4. It is important to determine the right number of allowances to claim to avoid trouble when filing taxes or to keep from giving the government an interest-free loan by paying too much in taxes only to receive the amount back later.

The new version of Form W-4, introduced by the IRS in 2020, reduces the number of sections on the form from seven to five. The Tax Cuts and Jobs Act no longer allows for personal or dependency allowances, though other types of allowances remain. Employees can change their withholding allowances whenever they want by filing a new Form W-4 with their employer. However, it’s not wise for an employee to update their W-4 forms or adjust their allowances on a whim; life changes should be the primary trigger for withholding-allowance changes.

In summary, allowances on W-4 are exemptions that reduce the amount of income tax an employer deducts from an employees paycheck. The employee fills out Form W-4 to indicate the number of allowances they are claiming, and the amount of withholding is based on filing status and the number of withholding allowances claimed on the W-4. The new version of Form W-4 reduces the number of sections on the form from seven to five, and employees can change their withholding allowances whenever they want by filing a new Form W-4 with their employer.