Amount of Withholding

• The amount that is withheld from your paycheck depends on how much you are projected to make during the year and the number of allowances that you claim. (See next section.) Many countries, including the United States, use a progressive tax system, meaning that the more money you make, the more you pay in income taxes.
  
  

Withholding Allowances

• The number of allowances that you claim also affects the amount that is withheld. An allowance acts as a sort of income-tax withholding reducer: Each allowance decreases the amount of income tax withheld from your check. Many taxpayers who are heads of households claim one allowance for themselves, one for their spouse (if filing jointly) and one for each dependent living at home. Others claim allowances depending on their projected tax liability (if they are divorced and paying alimony, for instance, or if they can claim a mortgage-interest deduction).
  
  It is important to remember that withholding allowances do not reduce income-tax liability without the proper deductions to back them up. If you claim a large number of allowances, you may end up having too little withheld by the end of the year and owe the IRS. Conversely, if you do not claim enough you may have too much withheld, which results in a refund. Though many are understandably glad to receive a refund, they forget that they have been deprived of the use of that money throughout the year -- to pay bills, for instance, or even to earn interest in a savings account.
  
  

Earnings Exempt from Withholding

• Some income is exempt from withholding -- e.g., tax-exempt interest income from bonds issued by states, cities or counties is not subject to federal income tax. Certain other forms of income -- worker's compensation and welfare payments are examples -- may not be, depending on all other sources of income you received. Consult a tax expert if you are in doubt.
  
  

Reasons for Withholding

• Tax withholding helps citizens to plan better for their tax bill at the end of the year. It also encourages people to file tax returns, because they have had money withheld throughout the year.
  
  

Arguments Against Income Tax Withholding

• Some anti-tax critics argue that, because tax-withholding payments are made in small installments over the course of the year, it reduces the potential outcry from taxpayers, since most of the taxes are paid with money that the citizens never see -- deducted before they receive their paycheck. Also, people are less likely to complain than if they had to make one large lump-sum payment. Even the self-employed have to make quarterly income-tax payments, or they risk IRS penalties. Thus, people don't effectively grasp just how much income tax they are paying.