Few things are quite as disheartening as working long hours, only to see a big chunk of your hard-earned money taken out in federal and state taxes. While paying taxes is an inevitability for the majority of taxpayers, there are circumstances when workers can choose not to have federal and state taxes out. Because of the nature of tax law and requirements, it’s best to check with your state’s tax board, or a tax professional for more direction.
If you had no tax liability last year, and no anticipated tax liability this year, then you may be eligible to claim exempt on your W-4 and have no federal tax taken out of your paycheck. However, in the event that you will owe taxes, claiming exemptions on your W-4 could result in an increased tax burden during filing season.
Federal Income Taxes and Claiming Exempt
When you earn income as an employee, you will notice automatic withholdings taken from your paycheck. No matter where you live, you will have federal income tax and FICA tax withheld by your employer. Depending on your state, however, you could also have state income tax as well as local taxes and state unemployment taxes to contend with. The IRS imposes mandatory payroll taxes such as FICA, the Federal Insurance Contributions Act tax, on every employee’s wages. FICA taxes include your contributions to Social Security and Medicare. For FICA taxes, you’re responsible for half of the total tax, and your employer is responsible for paying the rest on your behalf.
In addition to all of the above, you will more than likely also find federal income taxes withheld, unless you are exempt. When you’re exempt from federal tax withholdings, this means that you will have no federal taxes taken out of your paycheck, but you will still probably have FICA taxes withheld by your employer. In order to qualify to claim exempt tax status, you must have had no tax liability for the prior year, and anticipate no tax liability for this year. There are other requirements for eligibility such as dependency status and income thresholds that you must meet before claiming exempt status. The IRS provides a worksheet on page 11 of IRS Publication 505 to help you determine if you’re eligible to claim exempt status or not.
Keep in mind, claiming exemption from federal income tax withholdings does not mean you do not have to file taxes. If you meet other criteria, you may still be required to file. Also, if you plan to itemize your deductions, you are not able to have no federal withholding or file exempt status. If you determine that you are eligible to claim exempt status, you can do so on line seven of Form W-4 by simply writing “exempt” in the space provided.
Can I Claim Exempt on State Taxes?
Some states allow you to claim exempt status on your state income taxes, too. Michigan, for instance, allows taxpayers to have no state income taxes withheld if they had no state income tax liability for the previous year, and their employment is full-time. There are a few other criteria that must be met before being able to claim exemption in Michigan, and each state’s rules vary. Check with your state’s tax agency for more information regarding claiming exempt status on your state income tax return, such as filing deadlines and appropriate forms.
Upping Your Allowances
If for some reason you find yourself unable to claim exempt status, you can always increase the number of allowances on your W-4. Increasing your number of allowances gives you a larger paycheck each pay period, although you probably will not see your federal withholdings reduced to zero. You may take one allowance for yourself, your spouse and each of your dependents. It’s worth noting, that the more allowances you claim, the more likely you are to have a tax bill come tax time. Consulting with your tax preparer, as well as familiarizing yourself with the IRS’ website, will help you determine your best course of action when you adjust your tax withholding.
Tara Thomas is a Los Angeles-based writer and avid world traveler. Her articles appear in various online publications, including Sapling, PocketSense, Zacks, Livestrong, Modern Mom and SF Gate. Thomas has a Bachelor of Science in marine biology from California State University, Long Beach and spent 10 years as a mortgage consultant.