What Is a Tax Allowance?

What Is a Tax Allowance?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A tax allowance is a specific amount that you’re allowed to subtract from your income for tax purposes. These allowances can help you to decrease the amount of income you need to pay tax on. In other words, with each allowance you claim, you reduce your taxable income for the year, and therefore the amount of taxes you owe. However, take note that how much each allowance reduces your taxable income depends on your overall income and the current tax-code.

Related Questions

1. How does a tax allowance work?

A tax allowance works by reducing your taxable income, therefore decreasing the amount of tax you owe. When you fill out your W-4 form for a new employer, you choose the number of allowances you claim. The more allowances you claim, the less tax will be withheld from your paycheck.

2. How do I determine my tax allowance?

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You can compute your tax allowance by reviewing IRS’s guidelines and worksheet in Form W-4. This form will guide you through how many allowances you can claim including for yourself, a spouse, and dependents. The higher your total allowances, the less tax your employer withholds from your paycheck.

3. What happens if I claim too many tax allowances?

If you claim too many tax allowances, you run the risk of underpaying your taxes throughout the year. This could result in owing money when you file your tax return, rather than receiving a refund. In extreme cases, you may also have to pay a penalty for underpayment.

4. Can I claim zero allowances?

Yes, you can claim zero allowances on your W-4 form. This means that your employer will withhold the maximum amount of income tax from your paychecks. Claiming zero allowances is usually done when you expect to owe taxes at the end of the year.

5. Are there different types of tax allowances?

Yes, there are different types of tax allowances that you may be eligible for, depending on your situation. For example, there’s personal allowances which you can claim for yourself, while dependent allowances can be claimed for each eligible child or dependent in your household. Each type of allowance reduces your taxable income.