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Withholding Tax
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A withholding tax is a tax automatically taken from income received during the year. Individuals paying too much withholding tax will receive a tax refund; individuals paying too little withholding tax will owe additional taxes at the end of the year. The amount of withholding tax depends on the amount of income and the number of allowances claimed on the IRS Form W-4, Employee’s Withholding Allowance Certificate: more allowances mean a smaller withholding tax. Taxpayers can adjust this number by submitting a revised Form W-4 to their employer. In addition, individuals who do not pay withholding tax, or fail to pay enough withholding tax, can lessen their year-end tax burden by paying an estimated tax. Income unrelated to wages is exempt from withholding tax, such as capital gains, interest, and dividends. As a result, individuals with considerable amounts of such income will owe more taxes at the end of the year. However, pensions, bonuses, commissions, and gambling winnings are not exempt from withholding tax.
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