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What is withholding tax allowance?

        Money | Taxes

The withholding tax allowances determine how much federal tax is held back from each paycheck.
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In a 2014 poll, nearly 50 percent of Americans believed that middle-income people pay too much in federal taxes [source: Gallup]. Though you don't have complete control over the amount you pay, you do have some say in how much tax is taken from your paycheck from week to week. Workers claim "withholding tax allowances" on their W-4 forms and submit them to their employers. These numbers determine how much federal tax is held back from each paycheck. The more allowances you claim, the less tax is withheld.

If you claim the correct number of allowances, you may be eligible for a small refund when Tax Day rolls around. Overestimate your withholding allowance, and you'll get a big refund. That may seem great in April, but it also means that you'll have less cash in your pocket every payday. On the other hand, if you take too few allowances, you'll face a tax bill in the spring. Considering your individual circumstances will lead to the best decision for you.

For example, a married couple usually takes two allowances. An additional allowance is claimed for each child. Although the W-4 forms come with instructions on how to determine allowances, as people's lives become more complicated, more help is often needed. The IRS has an online withholding calculator that lets taxpayers use information from their pay stubs and tax returns to settle on the best number of allowances.

If you're unmarried, work one job and take one allowance, you'll likely get a refund. Request two allowances, and less money will be withheld, so each paycheck will be a bit higher. However, by tax time you might have to fork over a bit more for your share.

When a single person works two jobs, two allowances are standard. You can divide this up as you wish on your two W-4s. Also, if you file as head of household, receive the child tax credit, or claim child or dependent care expenses, you are eligible for more allowances.

Zero allowances are unusual. For tax purposes, some employed college students are still considered their parents' dependents. These students claim zero allowances on their W-4 forms.

Your withholding tax allowance isn't set in stone, merely inscribed on paper. Therefore, you can change them at any time by filling out a new W-4 and presenting it to your employer. The changes in withholding and, therefore, the adjustment to your wages appear within a few pay periods. Circumstances that may cause you to reconsider your allowances include marriage, divorce or a change in the number of dependents. That continually crying bundle of joy is a brand new allowance for you. You may be getting less sleep, but with another allowance, you'll also end up with more take-home pay.