What’s the difference between an allowance and a dependent exemption?
You report your personal allowances to your employer on Form W-4. Your employer will use the number of allowances you report to figure how much tax to withhold from your paycheck. The greater the number of allowances, the less tax your employer will withhold.
A dependent exemption is an amount you subtract from your Adjusted Gross Income (AGI) on your tax return to arrive at your taxable income. The number of exemptions you will take is one factor used in arriving at the number of allowances on your W-4
In short, an allowance is used by your employer to calculate how much to withhold from your paycheck, and a dependent exemption is used on your tax return to calculate your actual tax liability.
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