What is the difference between allowances and exemptions

Why Zacks? Learn to Be a Better Investor. Forgot Password. After all, with the myriad of opportunities available to reduce your tax liability via allowances, exemptions, deductions and credits, many individuals are afraid that they are missing out on highly valuable savings.

The terms "allowance" and "exemption" come up often in terms of tax filing, but some confusion exists as to what each refers to specifically. Whereas exemptions are notated on the Internal Revenue Service Form and serve to reduce your overall taxable income amount, an allowance is claimed as part of the W-4 process and allows you to withhold the amount of tax taken out of each paycheck.

Exemptions are used to reduce your total taxable income as per federal and state guidelines. An allowance, however, is used to reduce the specific amount of tax taken out of your regular paycheck. Exemptions help reduce your total tax liability, but allowances do not. Broadly defined, an exemption acts as a lawful means to reduce the amount of income that the IRS and state governments will examine in order to determine your annual tax bill. Prior to the introduction of the Tax Cuts and Jobs Act, both personal and dependent exemptions were available for tax filers.

That being said, this recent legislation has completely removed the possibility for claiming these exemptions until There are different types of exemptions that include: personal, dependency, and retirement if you choose any one or a combination of these options.

Allowances come in all forms and can allow you to reduce your taxable income. This can be done by either giving allowances that offer cash, reimbursements, or benefits-in-kind BIK. All of these options provide a reduction in the amount of tax an individual must pay each year. In most cases, allowances are given out by your employer. Allowances are tax deductions offered by employers to their employees.

Employers can offer different types of allowances for personal use, such as cell phones or free parking spaces on the work premises.

Allowances can also come from other sources, such as professional registration bodies or government departments that give out special work-related permits or licenses. Other types of allowances may include uniform allowances, travel allowance expenses incurred by an employee while on duty.

Exemptions are income categories that you can choose to apply for, where your income falls into one of these categories. In addition, exemptions are often used as a type of deduction. S-Corp vs. C-Corp SEP vs. Indirect Costs Can I Retire? Get new articles by email: Oblivious Investor offers a free newsletter providing tips on low-maintenance investing, tax planning, and retirement planning. Join over 21, email subscribers:. Subscribe Articles are published Monday and Friday.

Tax Exemptions vs. January 25, Comments Ace says. January 25, at pm. Mike, You should also do a follow-up post on the folly of intentionally over-withholding so you get a big refund in the spring. Mike says.