General rule. An employee may claim, with respect to wages paid after December 31, 1981, a number of withholding allowances determined in accordance with this section. In order to receive the benefit of such allowances, the employee must have in effect with his employer a withholding exemption certificate claiming such allowances.

Items that may be taken into account. The following items may be taken into account in determining the number of withholding allowances an employee may claim:

Estimated itemized deductions allowable under chapter 1,

The estimated tax credits allowable under Subpart A of Part IV of Subchapter A of Chapter 1, except:

For the credit for tax withheld on wages under section 31(a) (relating to wage withholding),

For the credit for tax withheld at source on nonresident aliens and foreign corporations and on tax-free covenant bonds under section 32,

That the employee may claim the credit for certain uses of gasoline and special fuels under section 39 only to the extent the employee has not filed for a quarterly tax refund of the credit on Form 843,

That the employee may claim the credit for earned income under section 43 only to the extent the employee has not filed for advance payments of the credit on Form W-5, and

For the credit for overpayment of tax under section 45,

The estimated trade and business deductions of employees described in section 62 (2) and allowed by Part VI of Subchapter B of Chapter 1,

The estimated deduction for payments to pension, profit-sharing, annuity, and bond purchase plans of self-employed individuals described in section 62(7) and allowed by section 404 and section 405(c),

The estimated deduction for penalties forfeited because of premature withdrawal of funds from time savings accounts or deposits described in section 62(12) and allowed by section 165,

The estimated direct charitable deduction under section 170(i),

The estimated deduction for net operating loss carryovers under section 172,

The estimated deduction for alimony, etc., payments under section 215,

The estimated deduction for moving expenses under section 217 but only to the extent that the amount of such deduction is not excluded from the definition of wages by section 3401(a)(15),

The estimated deduction for certain retirement savings under section 219 but only to the extent that the amount of such deduction is not excluded from the definition of wages by section 3401(a)(12)(D),

The estimated deduction for two-earner married couples under section 221,

The estimated net losses from schedules C (Profit or (Loss) From Business or Profession), D (Capital Gains and Losses), E (Supplemental Income Schedule), and F (Farm Income and Expenses) of Form 1040 and from the last line of Part II of Form 4797 (Supplemental Schedule of Gains and Losses),

The estimated amount of decrease of tax due attributable to income averaging under sections 1301 through 1305.

Definitions—(1) Estimated. The term “estimated” as used in this section to modify the terms “deduction”, “deductions”, “credits”, “losses”, and “amount of decrease” means with respect to an employee the aggregate dollar amount of a particular item that the employee reasonably expects will be allowable to him for the estimation year under the section of the Code specified for each item. In no event shall that amount exceed the sum of:

The amount shown for that particular item on the income tax return that the employee has filed for the taxable year preceding the estimation year (or, if such return has not yet been filed, then the income tax return that the employee filed for the taxable year preceding such year), which amount the employee also reasonably expects to show on the income tax return for the estimation year, plus

The determinable additional amounts for each item for the estimation year.

Amount of decrease of tax due. The term “amount of decrease of tax due” as used in paragraph (b)(13) of this section means:

The amount of tax that the taxpayer would owe on his taxable income without using Schedule G (Form 1040), minus

The amount of tax that the taxpayer would owe on his taxable income using Schedule G (Form 1040).

Itemized deductions. The term “itemized deductions” as used in paragraph (b)(1) of this section has the same meaning as ascribed thereto by section 63(f) and the regulations thereunder.

Computing allowances. (1) The employee shall compute the number of allowances he may claim for the items specified in paragraph (b) of this section in accordance with the tables and instructions on Form W-4.

If the employee:

Pays or accrues amounts demonstrably attributable to identifiable events (as defined in paragraph (c)(1) of this section) that are:

Interest attributable to ownership of real property and deductible under section 163(a), or

Taxes deductible under section 164(a)(1), or

Interest or taxes deductible under section 216(a), and

Is obligated to pay or accrue such amounts for at least 2 years subsequent to the estimation year,

Examples. The application of this section may be illustrated by the following examples:

Employee A has an estimated net loss from a partnership of $2,000 which would be reported on Schedule E. Employee A is not required to make any payments of estimated tax. Employee A may take her $2,000 partnership loss into consideration in determining the number of withholding allowances to which she is entitled in accordance with the tables and instructions on Form W-4.

Employee B has an estimated net loss from a business of $3,000 which would be reported on Schedule C. Employee B would also otherwise be required to make payments of estimated tax on income of $3,000. Employee B may not take his business loss into consideration in determining the number of withholding allowances to which he is entitled in accordance with the tables and instructions on Form W-4.

Employee C has an estimated net loss from a farm of $5,000 which would be reported on Schedule F. Employee C would also otherwise be required to make payments of estimated tax on income of $4,000. Employee C may only take her farm loss into consideration to the extent of $1,000 ($5,000-4,000) in determining the number of withholding allowances to which she is entitled in accordance with the tables and instructions on Form W-4.

Special rules—(1) Married individuals. (i) Except as provided in subdivision (ii) of this subparagraph, a husband and wife shall determine the number of withholding allowances to which they are entitled under section 3402(m) on the basis of their combined wages and allowable items. The withholding allowances to which a husband and wife are entitled may be claimed by the husband, by the wife, or they may be allocated between them. However, they may not both have withholding exemption certificates in effect claiming the same withholding allowance.

If a husband and wife filed separate income tax returns for the taxable year preceding the estimation year and reasonably expect to file separate returns for the estimation year, the husband and wife shall determine the number of withholding exemptions to which they are entitled under section 3402(m) on the basis of their individual wages and allowable items, and they shall be considered to be single for purposes of the tables on Form W-4.

Only one certificate to be in effect. An employee who is entitled to one or more withholding allowances under section 3402(m) and who has, at the same time, two or more employers, may claim such withholding allowance or allowances with only one of his employers.