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To make certain that the right amount of income tax is withheld from your paycheck, you need to claim the correct number of allowances on the W-4 form that you file with your employer. You have less money withheld when you claim more allowances. Much confusion exists between the terms "allowances" and "exemptions," and the terms are often used interchangeably. To have the correct amount of taxes withheld, it is important to understand the difference between each of these terms.
Allowances and Exemptions - The Difference
When you get a new job you fill out a W-4 form to help your employer calculate how much they should withhold from your paycheck in taxes. You can claim allowances on this W-4 form. On your income tax return, you generally claim an exemption for yourself and your spouse, as well as any dependents that you have. Your allowances claimed on your Form W-4 do not have to equal the number of exemptions that you claim, because they are based on separate criteria.
In the past, employers had to send the W-4 of any employee claiming more than 10 allowances in to the IRS, to make sure that the employee was having enough income tax withheld. Now, the IRS is using its own data more, making this unnecessary. The IRS will send notification to your employer if you are only allowed to claim a certain number of allowances. Absent this, you may claim any number of allowances you like.
You may claim the number of exemptions on your tax return that you are legally entitled to. This is generally one exemption for you and one for your spouse if you are filing a joint return. You may also claim one exemption for each of your dependents who you are qualified to claim. You need to list the Social Security number of each dependent, to ensure that you are not claiming dependents fraudulently.
Form W-4 contains worksheets to assist you in claiming the correct amount of allowances, so that you have the correct amount of tax withheld. You can account for all of your dependents on these forms, as well as the amount of your projected itemized deductions and tax credits that you are eligible for. Choose the amount of allowances that you claim carefully, as being over-withheld means you give the IRS a free loan, and under-withholding may result in penalties.
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