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Withholding Allowances or Exemptions

There are three categories of withholding allowances.  Sometimes these are called "withholding exemptions" or just "exemptions".

Estimated Allowances

An employee may, in addition to regular withholding allowances and standard deduction amounts, claim federal withholding allowances based on estimated tax adjustments and estimated deductions. The adjustments are the allowable adjustments the employee may take on federal Form 1040 (US Individual Income Tax Return) and include itemized deductions, tax credits, trade and business deductions, moving expense deductions, direct charitable deductions, net operating loss carryovers, alimony payments, and net losses from business or farming. The earned income credit may not be taken for withholding purposes if the employee elected advance payments of the credit. Form W-4 (Employee's Withholding Allowance Certificate) contains the worksheet and schedules necessary to calculate the proper number of these withholding allowances.

Two earner couples are encouraged by the IRS to use one worksheet and combine their incomes and itemize their deductions, credits, and other items. If the spouse with the higher earnings takes all of the withholding allowances, the amount withheld should closely approximate the amount of tax due.

Personal Allowance; Personal Exemption

Personal exemptions free a specified amount of the employee's gross income from taxation on the employee's Form 1040 (US Individual Income Tax Return). Withholding allowances free approximately the same amount of wages from income tax withholding and therefore approximate the employee's tax liability at the end of the year. Exemptions and allowances may be used synonymously. An employee is entitled to federal withholding allowances for himself, his spouse, and his dependents. (An individual may not be claimed as a dependent if he is also claimed as a dependent on the tax return of another person.) An additional allowance may be claimed if the employee is entitled to file as a head of household. One additional allowance may be claimed if the employee has at least $1,500 of child or dependent care expenses for which he plans to claim a credit. The value of a personal exemption for 2007 for federal income tax purposes is $3,400. The value of the exemption used by upper income persons is reduced and phased out when adjusted gross income reaches specified levels. An employee must file a new Form W-4 (Employee's Withholding Allowance Certificate) within ten days if the number of allowances previously claimed decreases. If an employee has two or more employers, he may not claim a withholding allowance with one employer if he has already claimed the allowance with one of his other employers.

Special Allowance

An employee may claim a special federal withholding allowance. The allowance, which is used only for withholding purposes, may be claimed whether or not the employee plans to itemize deductions on his tax return.

The special withholding allowance can be claimed only if:

  1. the employee is single and has only one job at a time,
  2. the employee is married, has only one job at a time, and his spouse does not work,
  3. the employee has two jobs at one time and only one job pays more than $1,000, or
  4. the employee is married and both spouses work but only one job pays more than $1,000. is a free online resource featuring a compilation of research, collaboration and web tools for use by payroll professionals and more including information about payroll tax articles, federal tax information and state tax information.

Helpful Hint... Anytime you move or have a major life change (for example - marriage, divorce, birth of a child, etc.) always be sure to complete a new W-4!