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.
