Form W-4 is an IRS tax form completed by an employee to indicate their current tax situation. You usually complete a Form W-4 when you start a new job or your financial situation changes. This form estimates your personal allowances and lets your employer know how much federal income tax to withhold from each paycheck.
According to the IRS, if you had no income tax liability last year and expect the same for this year, you can claim exemption from withholding. But what does this exemption mean, and how do you know if you qualify?
- How Do I Know If I Am Exempt From Federal Withholding?
- Who Is Exempt From Federal Income Tax?
- Do You Still Get a Refund If You’re Exempt From Federal Withholding?
Every time you fill out a W-4, you might be wondering, “Am I exempt from federal withholding?” To claim exemption, you must meet a set of criteria.
“If your income can be canceled out by allowable tax deductions leaving you with no tax liability, you can elect to be exempt from federal withholding,” said Ben Watson, a certified public accountant and personal finance expert at DollarSprout. “However, if you had even $1 of tax liability in the prior year, you cannot claim an exemption in the following year.”
If you cannot claim exemption from withholding, you can still reduce the amount withheld from every paycheck by claiming allowances on Form W-4. As you add allowances, your tax withholding will decrease and your take-home pay will increase. When you claim fewer allowances, your tax withholding increases and you see less in your paycheck.
This is often a delicate balance. You don’t want to claim too many allowances, as your employer will not withhold enough tax based on your filing status. This could result in an underpayment penalty, which occurs when an individual does not pay enough of their total estimated tax.
Being exempt from federal withholding means your employer will not withhold federal income tax from your paycheck. When you claim tax exemption or certain deductions, they get subtracted from your annual gross income. This causes your taxable income to decrease as well.
If you file as single on your taxes for 2019, the standard deduction is $12,200. The standard deduction is $24,400 for individuals who are married and filing jointly. If your yearly income is less than this deduction, you would be classified as exempt — and you do not have to pay taxes. However, if you claim exemption from withholding and earn more than that this year, you will be penalized.
“(Exemption) is most common with individuals who earn less than the standard deduction or receive assistance in their living, such as children, dependents or those with handicaps limiting their ability to work,” Watson said.
You might be able to claim an exemption if you have the following exceptions:
- Student: You are not automatically exempt as a student. If you are a seasonal or part-time worker, you may qualify for this exemption.
- Age 65 or older: If Social Security is your only source of income, then you do not need to file a tax return. Social Security is not included in gross income. Fun fact: The IRS considers you age 65 the day before your actual birthday.
- Visually impaired: Due to cost of living, there is a higher standard deduction for those who are blind. This includes individuals who cannot see 20/200 with glasses or contacts or their field of vision is 20 degrees or less.
Unsurprisingly, most of these exceptions are based on level of income.
“Typically, people with lower income are the ones who qualify for the exemption from federal income tax,” said Paul T. Joseph, president at Joseph & Joseph Tax & Payroll. “However, there may be situations where higher-income people have suffered some other sort of loss in the previous year and expect that loss to continue and can file for the exemption.”
If you are a low-income filer, you may be eligible for various tax credits and deductions. However, keep in mind that this exemption does not apply to Social Security, Medicare or the federal unemployment tax.
“The employer is still required to withhold FICA (Federal Insurance Contributions Act) and Medicare, as well as state and local withholding,” said Mike Savage, CPA and CEO of 1-800Accountant. “If the employee claims exemption from state and local taxes, there would be a separate state and local form comparable to a federal W-4 form to complete.”
It’s also important to note that exemptions expire every year. If you claim an exemption but your situation changes at a later time, you must file a new Form W-4 within 10 days after the change. This exemption is only good for one year, and you must file by Feb. 15 of each year to continue your exemption.
Do You Still Get a Refund If You’re Exempt From Federal Withholding?
Taxpayers don’t love the confusion of filing taxes, but the anticipation of a large refund is always a nice reward. The IRS will issue tax refunds when you have overpaid. You receive this money only because you have paid more than what you owe. When you file for an exemption from withholding, you are not making any tax payments throughout the year. And since you are not paying any taxes, you will not qualify for a tax refund.
“Without paying tax, you could potentially still obtain a refund if you qualify to claim a refundable tax credit, such as the earned income credit,” Savage said. “Unless you qualify for one of these credits, you would typically not get any refund because nothing was paid in by you.”
The earned income tax credit benefits low- to moderate-income people and reduces the amount of taxes you owe. Another tax credit is the American opportunity tax credit, which gives students a refund on qualifying education expenses.
With tax season around the corner, it’s important to stay informed when it comes to tax withholding. If you are unsure whether you qualify for an exemption or a tax credit, please visit the IRS website for more details.
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