How To Claim Exempt For Your Federal Tax Status
Tax exempt federal tax filers do not have to pay federal taxes on their earned wages. As this could save the tax filer hundreds or thousands of dollars, those eligible should claim this status.
Why Claim Exempt?
When you're tax exempt, you keep that extra money in your paycheck rather than wait until the following year to get the money back in rebate form.
Step 1 - Determine if you Meet the Tax Exempt Guidelines
The IRS has a detailed set of guidelines that must be met by anyone claiming total tax exemption from federal taxes. The predominating traits of the tax exempt federal tax filer are:
- tax filers eligible for a refund of all federal income tax withheld in a year
- tax filers who make less than a
certain (low) amount of income
Step 2 - File a W-4 Form
You must file a W-4 form with your employer to claim this status. When filling out this form:
- include your name, social security number, and signature
- don't complete the two lines asking for allowances claimed and additional amount withheld
- write "EXEMPT" in the line asking if you meet tax exemption conditions
Step 3 - Avoid Underpayment Penalties
If your financial situation improves within the year and you will no longer be eligible for total federal tax exemption, don't forget to start paying estimated taxes and cancel your exemption status. You could have to pay a 5-6% underpayment penalty if you fail to do so.Source: m.finweb.com