Tax allowances explained

As of 2020, tax allowances are no longer used for IRS Form W-4.¹ Previously, the value of a tax allowance, also known as a withholding allowance, was tied to the amount of the personal exemption. But the deduction for personal and dependency exemptions has been suspended from tax years 2018-2025 by the Tax Cuts and Jobs Act.² What this means is that when filling out your W-4 for these tax years, tax allowances aren’t a part of the process.

But that doesn’t mean that tax withholding is irrelevant.

Let’s explore this topic further so you can better understand the differences between tax withholding versus tax allowance meanings and definitions.

IRS form W-4 used to include a section for claiming "withholding allowances." What’s the allowance meaning in tax speak? Essentially, these allowances reduced the amount of taxes withheld from each paycheck. The more allowances you claimed, the less taxes were taken out of your paycheck.

Each withholding allowance was tied to a “personal exemption” and afforded a dollar amount that was considered exempt from income tax. But The Tax Cuts and Jobs Act of 2017 temporarily suspended personal and dependency exemptions from 2018 to 2025, meaning tax allowances are no longer used.

Current W-4 forms are oriented towards gathering accurate information about a tax filer’s income, filing status, and dependents to correctly calculate how much should be withheld.

This is why, even though withholding allowances as they used to be configured are no longer applicable, we mentioned earlier that tax withholding, as a general practice, still exists.

Here's a breakdown of the key sections a filer fills out on IRS Form W-4 for tax years 2018-2025:

• Step 1: Provide your name, address, Social Security number, and filing status (Single, Married Filing Jointly, etc.).
• Step 2: If you have more than one job or your spouse also works, you'll need to complete this section to ensure enough taxes are withheld.
• Step 3: Here, you'll provide information about your dependents (children or other qualifying individuals) to calculate the appropriate tax credits.
• Step 4: This section allows you to account for other income (like interest or dividends), deductions (if you itemize), or request additional withholding. It is optional because it may not be applicable depending on your situation.
• Step 5: Sign and date: Review your entries and sign the form.

Preparing for filing season can be stressful. If you’re a Raisin customer searching for your tax documents related to earnings from your Raisin portfolio, we invite you to head to our “Tax Documents” page for answers to our most commonly asked questions including these (and more):

• “How do I access my Raisin tax documentation?"
• “Is interest on a CD that has not matured taxable?”
• “Do I need to report my 1099-INT on my tax return?"

Have more questions about taxes in general, how to file, or your personal finances? Head to our Tax Guides to learn more. There, you’ll find a variety of helpful informational articles aimed at keeping you as informed as possible about tax-related topics.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

Sources

1. https://www.irs.gov/newsroom/faqs-on-the-2020-form-w-4 
2. https://apps.irs.gov/app/vita/content/globalmedia/4491_dependency_exemptions.pdf 
3. https://www.irs.gov/credits-and-deductions-for-individuals