W-4: What Does It Mean to Claim Exempt?

Claiming you are tax exempt on Form W-4 tells the Internal Revenue Service that you are exempt from federal withholding. This may be the case if you were entitled to a full refund of all the federal taxes you paid last year and thus expect a full refund of all the federal taxes that would be withheld from your paychecks this year. You must also meet income limits to qualify for the federal tax exempt status.

To qualify for a federal tax exemption, you must have had a right to a refund of all the federal income tax withheld from your pay last year because you had no tax liability at all. Additionally, there are income limits. These limits are currently $12,000 if you’re single, $18,000 if you’re a single head of household and $24,000 if you’re married and filing jointly or separately. These limits are significantly lower if someone is claiming you as a dependent on their tax return. For a flow chart that can help you figure out if you qualify, see Page 10 of IRS Publication 505, Tax Withholding and Estimated Tax.

You’ll usually fill out a Form W-4 when you’re newly hired. Your boss or a member of the human resources staff provides you with a blank form that consists of instructions, an Employee’s Withholding Allowance Certificate and worksheets to help you figure out how many allowances to claim on the certificate. The part you fill out is the certificate, which you then return to your employer. Based on the number of allowances you’ve claimed, they’ll know how much federal income tax to withhold from your paychecks. The more allowances you claim, the less federal tax is withheld.

If you meet the requirements to claim you’re exempt from federal withholding, you fill out the W-4 as follows:

• Complete lines 1, 2, 3 and 4.
  
• Write “exempt” on line 7.
  
• Sign and date it.
  
• Return it to your employer.
  

Never neglect filling out a Form W-4. If you don’t, your employer is required by the IRS to withhold federal tax from your paycheck based on you being single with no allowances – in other words, at the highest rate. If you make an error on your W-4, just ask your employer for a new one, fill it out with the correct information and turn it in.

Generally, there is no specific due date for W-4s, and they don’t expire. You fill one out when you start a new job, and you fill one out when your personal or financial situation changes, like if you get married or add a new member to the family.

However, if you are claiming exempt, the exemption expires February 15th of each year. By this date, you must fill out a new W-4 and claim the number of allowances you’re currently entitled to or claim exempt again if you still qualify. If you don’t renew your exempt status, the IRS requires your employer to withhold federal tax based on the last W-4 you filed that had allowances on it. If they don’t have an earlier W-4 for you that lists allowances, they have to withhold federal tax as if you claimed no allowances at all.

If you’re unsure of how many allowances to claim, carefully read the instructions that come with the W-4 and check out the IRS’s webpage, “Tax Withholding for Individuals.” In addition to providing a good overview of federal tax withholding, it contains useful links, like the one to a withholding calculator. If you need help filling out the form, ask your employer or your tax preparer for assistance.

The Tax Cuts and Jobs Act signed into law in December 2017 means lots of changes for tax years 2018 and beyond. For starters, standard deductions have nearly doubled but there are no more personal exemptions. Some common deductions have been limited or completely eliminated. So even if you’re not starting a new job, now is a good time to review your W-4. Check it to make sure you’re not having too much or too little withheld. The IRS recommends making a habit of doing this annually.

Also new for the 2018 tax year is a completely redesigned Form 1040. The new Form 1040 is still in draft form, but it looks like it will be about half the length of the old one. It’s supposed to replace the old Forms 1040, 1040-A and 1040-EZ. The idea is to get more taxpayers using the same form and supplementing it with schedules as needed.