When you are hired as an employee in the United States, your employer will require you to fill out a W-4 form to determine how much of your earnings to withhold for taxes. You will list how many personal allowances you want to claim. Each personal allowance you claim reduces your taxable income. The IRS adjusts the amount each year for inflation.
Determine how many personal allowances you are eligible to claim by completing the Personal Allowances Worksheet that accompanies the W-4 form. This worksheet will usually give an equal or greater number of personal allowances for people who do not plan to claim many tax deductions, adjustments to income and tax credits on their income tax return at the end of the year.
Complete the Deductions and Adjustments Worksheet that accompanies the W-4 form to see if you are entitled to claim additional personal allowances because of tax deductions and credits you plan to claim. For example, if you plan to take deductions for contributions to your traditional IRA and health savings account, the interest you pay on your mortgage and charitable donations, and you will claim the energy efficiency tax credit, you may be entitled to have fewer dollars withheld because you will owe a smaller amount at the end of the year.
Claim the maximum number of personal allowances you are allowed based on the larger of the allowances on the Personal Allowances Worksheet or the Deductions and Adjustments Worksheet on your W-4 form. The advantage to filling out both forms is that you can compare the number of personal allowances each permits so that you can know which one allows you to best minimize your tax withholding.
File a new W-4 form with your employer if your circumstances change during the year. For example, if you have a child, you will have an additional dependent, which means you can claim an additional personal allowance and further reduce your tax withholding.