What Total Number of Allowances You Are Claiming Means

Federal income tax withholding is a system through which employees pre-pay their annual tax obligations to the government. Employers are responsible for deducting a portion of an employee’s wages each pay period and remitting it to the Internal Revenue Service (IRS). This process helps individuals avoid a large tax bill at the end of the year by spreading payments throughout the tax period. Accurately managing this withholding is important to prevent underpayment penalties or an excessively large tax refund.

Understanding Allowances on the W-4

Prior to 2020, the W-4 form, known as the Employee’s Withholding Allowance Certificate, utilized a concept called “allowances.” These allowances served as a mechanism to reduce the amount of an employee’s income subject to federal tax withholding. Each allowance claimed effectively lowered the portion of wages from which tax was withheld, leading to a larger take-home pay for the employee. The number of allowances an individual could claim was generally linked to factors like personal exemptions, the number of dependents, and certain expected tax deductions or credits. For instance, a taxpayer might claim one allowance for themselves, one for a spouse, and one for each dependent.

The Evolution of the W-4 Form

The framework for federal income tax withholding underwent a significant change with the passage of the Tax Cuts and Jobs Act (TCJA) of 2017, which notably eliminated personal exemptions from 2018 through 2025. Since the concept of allowances on the W-4 form was directly tied to these personal exemptions, the IRS found it necessary to redesign the form. Starting in 2020, the IRS introduced a new W-4 form that no longer uses withholding allowances. The redesign aimed to simplify the form, enhance withholding accuracy, and increase transparency. The revised form incorporates direct inputs related to an employee’s tax situation, such as filing status, dependents, other income, and deductions, to better align withholding with actual tax liability.

Determining Your Current Withholding

This form guides employees through several steps to accurately reflect their tax situation. Step 1 requires basic personal information, including name, Social Security number, address, and filing status (e.g., Single, Married Filing Jointly, Head of Household).

Step 2 addresses situations where an individual holds multiple jobs or is married and their spouse also works. This section helps ensure that enough tax is withheld from combined incomes to avoid underpayment.

Step 3 is where employees can account for the Child Tax Credit and the Credit for Other Dependents, directly reducing their withholding based on eligible credit amounts. Step 4 allows for further adjustments to withholding.

Step 4(a) is used to include other sources of income not subject to withholding, such as investment income or side gig earnings, to prevent under-withholding. Step 4(b) enables employees to account for itemized deductions or specific tax credits beyond the standard deduction, which can decrease the amount withheld. Finally, Step 4(c) provides an option to request an additional amount of tax to be withheld from each pay period.

Steps to Adjust Your Withholding

Employees should consider adjusting their withholding whenever their financial or personal circumstances change significantly. Such events include marriage or divorce, the birth or adoption of a child, starting a new job, or experiencing a substantial change in income or deductions.

To adjust your withholding, you will need to obtain a new W-4 form, which can typically be secured from your employer’s human resources or payroll department, or directly from the IRS website. Complete the form to accurately reflect your updated financial situation, including any changes to filing status, dependents, other income, or deductions. Submit the completed and signed W-4 form to your employer.

It is common for changes to take one or two pay periods to become effective. After the change, it is advisable to review your pay stubs to confirm the new withholding amount is accurate. The IRS Tax Withholding Estimator tool is also available online to help you determine the appropriate withholding amount for your situation.