When Can I Claim Exempt On My W-4?

Claiming exempt on your W-4 can be tricky business, so let’s clear up the confusion.

Form W-4 tells the employer the proper amount to withhold from the employee's paycheck for federal taxes. (Interested in how federal withholding is calculated? Click here). Providing accurate information on a W-4 will guarantee you won’t have a large balance due when tax time comes around. A W-4 can also help you avoid overpaying your taxes. As a result, this will put more money in your pocket throughout the year.

Exemption from withholding tax

When filling out a W-4 an employee has the option to claim exempt from federal withholding tax. If you claim exempt, this means no taxes will be taken out of your paycheck during the year to compensate what you may owe to the IRS.

Eligibility for claiming exempt
In order to legally claim exempt on your W-4, both of the following clauses need to be accurate:

1. In the past year, you had no tax liability; you legally could refund all of your federal income tax withheld.
2. For the year present, you intend on refunding all federal income tax withheld because you expect to incur no tax liability.

Remember, both of these statements above must be true, or else you are not eligible to claim exempt on your W-4.

If I’m legally exempt, how do I report it?
If you are indeed eligible to claim exempt, you can report it on the W-4. In Box 7, you will need to write “EXEMPT”. Writing this will guarantee that withholdings are not taken from your future paychecks.

Other reasons you may not be exempt

In some instances, claiming exempt on your W-4 is not necessarily an option. Listed below are circumstances when claiming exempt would not be the right choice.

1. If you intend on claiming dependents on your tax return.
2. If your 2017 income includes more than $350 of unearned income, such as interest and dividends.
3. If you will be itemizing your deductions.

For more scenarios, visit the IRS Tax Withholding Document.

Claiming exempt without eligibility

If you claim exempt on your W-4 without actually being eligible, expect a fairly large tax bill after filing your tax return and possible penalties.
If both of the following statements apply to you personally, you could be facing a $500 penalty fee:

1. You declare withholding allowances on your W-4 that reduces the amount of tax withheld from your paycheck.
2. You have no justifiable reason for those statements or allowances at the time you completed your W-4.

Claiming exempt can have some major ramifications. Next time you are filling out a W-4 make sure to keep in mind what qualifies you as exempt and the associated penalties.