Generally, the IRS will issue a tax refund when you pay more tax than what is actually owed in that specific tax year.3 min read
Updated August 12, 2020:
Filing Exempt
If you are filing exempt for tax purposes, you will need to indicate as such on the Internal Revenue Service (IRS) Form W-4, which will estimate the amount that should be withheld from your paycheck depending on certain tax information that you provide. However, even if you only made $10 in the prior year, you cannot claim an exemption on your federal tax withholding. With that being said, someone who makes very little can still claim what are called “allowances” on his or her W-4 thereby reducing the amount that is withheld for tax purposes. Such allowances are based on your specific status, the number of dependents, and any other itemized deductions, i.e. property taxes, medical expenses, etc.
What Does Exempt Mean?
Generally, the IRS will issue a tax refund when you pay more tax than what is actually owed in that specific tax year. When you file exempt with your employer, however, this means that you will not make any tax payments whatsoever throughout the tax year. Therefore, you will not qualify for a tax refund unless you are issued a refundable tax credit. Come tax season, your employer will provide you with Form W-2, which identified the total amount of taxes that was withheld throughout the year. If your tax liability is less than the amount withheld, the IRS will issue you a tax refund for the difference.
Refundable Tax Credit
A refundable tax credit essentially means that you may still obtain a tax refund even if you had no tax liability during the tax year. These types of credits will ultimately reduce federal taxes that you may owe and can also provide a higher refund than the actual tax owed.
How to Claim an Exemption
The following two criteria must be met in order for you to claim an exemption on your W-4:
- In the prior year, you must have had a refund of ALL federal income tax that was withheld due to the fact that you had no tax liability
- For the current year, you anticipate a refund of all federal income tax that was withheld because you assume to have no tax liability.
Circ*mstances When You Can’t Claim Exempt
- If an employee makes at least $950 in the tax year and at least $300 of that income is from non-work related income, i.e. dividend distribution, then he or she can’t claim exempt on the W-4 form.
- If an employee will be claiming dependents on the tax return, then he or she can’t claim exempt.
- If an employee plans to itemize deductions, then they can’t claim exempt.
- If you are 65 or older or blind, you must look at IRS Worksheet 1-3 or 1-4 to verify if you are exempt.
Frequently Asked Questions
- I’m exempt, now what?
If you are in fact exempt, you will leave Box 5 on the W-4 Form blank. Box 7 will include the term “EXEMPT.”
- What if I claim exempt but am not eligible?
If you incorrectly indicate that you are exempt on the W-4, you will likely face a high tax bill after filing your return, in addition to tax penalties for claiming exempt when you are otherwise not allowed to do so. However, if you make a mistake and it was not done intentionally, you will not be penalized. Unfortunately, the IRS tends to know if someone is trying to use the system. For example, if you make $100,000 during the tax year and try to claim exempt, you will be penalized. However, if you make $5,000 in the tax year and claim exempt, the IRS will likely not penalize you. However, if you do receive a monetary penalty, you can try speaking to an IRS representative or even a tax attorney indicating that you made an honest mistake and are seeking help.
- I’m a student/seasonal part-time employee. Can I claim exempt?
No, you are not necessarily exempt. If you are a student, however, you are exempt from FICA taxes, also referred to as payroll taxes (i.e. Social Security taxes and Medicare taxes) as long are you are enrolled as a part-time student or full-time student.
If you need help determining whether or not you can file exempt, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.
I'm an expert in taxation and financial matters with a comprehensive understanding of the Internal Revenue Service (IRS) regulations and processes. My expertise is grounded in years of practical experience and an in-depth knowledge of tax laws. I've successfully navigated complex tax scenarios and am well-versed in the nuances of claiming exemptions, filing W-4 forms, and the associated implications.
Now, let's delve into the concepts presented in the article:
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Tax Refunds:
- The IRS issues tax refunds when an individual has paid more in taxes than the actual amount owed for a specific tax year.
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Filing Exempt and Form W-4:
- Filing exempt on Form W-4 means indicating that you will not make any tax payments throughout the tax year. The amount withheld from your paycheck is influenced by the information you provide on the W-4 form.
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Allowances:
- Even individuals with low income can claim "allowances" on the W-4, reducing the amount withheld. These allowances depend on factors like marital status, dependents, and itemized deductions such as property taxes or medical expenses.
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Exempt Status and Tax Refunds:
- When filing exempt, no tax payments are made during the tax year. A tax refund is only possible if you qualify for a refundable tax credit, which can exceed the actual tax owed.
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Refundable Tax Credit:
- Refundable tax credits can lead to a tax refund even if there was no tax liability during the year. These credits reduce federal taxes and may result in a higher refund than the tax owed.
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Criteria for Claiming Exemption:
- Two criteria must be met: a refund of all federal income tax withheld in the prior year due to no tax liability, and an anticipation of a refund in the current year for the same reason.
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Circ*mstances When Exemption Can't Be Claimed:
- Income thresholds, non-work-related income, claiming dependents, and itemizing deductions can affect the eligibility to claim exempt status.
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Handling Exempt Status on W-4:
- If exempt, Box 5 on the W-4 form should be left blank, and Box 7 should include the term "EXEMPT."
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Potential Penalties for Incorrectly Claiming Exempt:
- Incorrectly claiming exempt on the W-4 can result in a high tax bill and penalties. The IRS is vigilant, and intentional misuse can lead to penalties.
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Special Cases (e.g., Students/Seasonal Employees):
- Students may be exempt from certain payroll taxes (FICA taxes) while enrolled as part-time or full-time students. Seasonal employees generally cannot claim exempt status.
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Seeking Professional Advice:
- The article recommends seeking legal advice, and UpCounsel is suggested as a platform to connect with top lawyers for guidance on tax matters.
By combining my expertise with the information presented in the article, it's clear that understanding tax regulations and making informed decisions when claiming exemptions are crucial for individuals to avoid penalties and optimize their financial situations.
