Difference Between Allowances and Exemptions

Allowances are what your employer gives you to make up the difference of withholding tax. This type of income will never be reported on a W-form under most circumstances.

Exemptions usually reduce taxable income for either personal use, such as owning your home or driving to work or in some cases, it can be transferred to another person by means of a gift.

Comparison Table Between Allowances and Exemptions

Parameters of Comparison
Allowances Exemptions
DefinitionAn allowance is a fixed sum that an employee receives from their employer to use for the expenses associated with performing their job.An exemption is a type of deduction that reduces taxable income.
AdvantagesFlexible Use and Easier to Claim (on Your Own).No Limits Based on Type of Expense or Child Qualifications.
DisadvantagesMay Be Limited Based on Paying for Child Care or Elderly Care.May Not Be Available to All Taxpayers (as Others Might be Eligible).
DeductionsIn allowances, the deductions are taken from the total income.In exemptions, deductions are given after deducting a specific amount.
DependentsIn allowances, dependents can claim themselves.But in exemptions, only one person is allowed to be claimed as a dependent.

What are Allowances?

Allowances come in all forms and can allow you to reduce your taxable income. This can be done by either giving allowances that offer cash, reimbursements, or benefits-in-kind (BIK).

Allowances are tax deductions offered by employers to their employees. Employers can offer different types of allowances for personal use, such as cell phones or free parking spaces on the work premises.

Allowances can also come from other sources, such as professional registration bodies or government departments that give out special work-related permits or licenses.

Tax-exempt allowances, such as certain gift cards and loyalty programs that offer free merchandise, do not have to be counted towards an individual’s earnings for tax purposes.

What are Exemptions?

Exemptions are income categories that you can choose to apply for, where your income falls into one of these categories.

For example, if you’re eligible for an exemption due to low income or age, then this means that you don't have to pay taxes on that portion of your income.

These tax deductions come from specific items or expenses incurred during an employee’s job-related activities, which can include tools and equipment-related activities, travel allowance expenses for work-related activities, and expenses for uniforms.

Exemptions are also used to reduce an individual’s taxable income, but they differ from allowances because exemptions do not have a cash value and will only apply under certain circumstances.

Both allowances and exemptions have a cash value, but there are differences in when they can or will apply to an individual’s tax return.

Main Differences Between Allowances and Exemptions

  1. If a child is claimed as an exemption by more than one taxpayer, the exemptions are prorated based on the percentage of support provided.
  2. Allowances can be claimed on a person's tax return, but exemptions cannot, while exemptions reduce the amount of taxable income available while allowances increase it.

Conclusion

Both allowances and exemptions have a cash value, but there are differences in when they can or will apply to an individual’s tax return. Exemptions are usually only available to those with lower incomes, whereas allowances are available to everyone.

Allowances can be granted based on certain qualifications, such as if you are retired or disabled; however, exemptions must be specifically listed in the law for which they apply.

References

  1. https://books.google.com/books?hl=hi&lr=&id=gYaJq2S6Ud0C&oi=fnd&pg=PT11&dq=Allowances&ots=VwxiyWus3W&sig=JjNj7zOSXwE3r8OFNZuSfsrvodY
  2. https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/hlr63&section=88
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