Most workers have a certain amount withheld from each paycheck and applied toward their annual federal income tax. The amount is determined by the employer based on the number of allowances an employee claims on his Internal Revenue Service Form W-4. Although being "exempt" from income tax withholding has a different legal definition from the number of allowances a worker can claim, these allowances are often called "exemptions," even by the IRS.
Form W-4
The number of allowances on Form W-4 is used to calculate the amount of tax withheld from each paycheck. If you choose the proper number of allowances, you ideally end up with a $0 balance on your taxes for the year. That means you don't get a refund, but you also don't owe the government a dime. A new employee fills out the Form W-4 when he is first hired. The form includes a worksheet that helps workers determine the number of exemptions. For instance, a single person with no dependents should claim 1, while a married person with one dependent child should claim 3.
Changing Your Exemptions
The bottom line is you can change your number of payroll exemptions as often as you wish by simply submitting a new Form W-4 to your employer. However, while an employer can implement any changes immediately, it doesn't have to apply it until the start of the first payroll period ending 30 days or more after you submit the new W-4. In a practical sense, this could limit the number of possible changes during the year.
Life Events
There are certain circumstances where you should submit a new W-4 and change your exemptions and certain circumstances under which you must. Any major life event is a time to consider changing your W-4. For instance, if you marry or have a child during a particular tax year, you may wish to claim additional exemptions going forward. However, in the event you divorce or undergo any other situation that decreases the number of exemptions (rather than increasing them), the IRS requires you to submit a new W-4 within 10 days.
True Exemption
Although the number of withholding allowances are popularly called exemptions, there are circumstances where a taxpayer may be able to claim actual exemption. That means your employer will not withhold any income tax from your paycheck. This can only happen if you got a refund of all federal tax in the prior year because you had no tax liability, and you expect to have the same thing happen in the current tax year. You must file a new W-4 each year if you expect to claim this exemption.
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Writer Bio
Eric Strauss spent 12 years as a newspaper copy editor, eventually serving as a deputy business editor at "The Star-Ledger" in New Jersey before transitioning into academic communications. His byline has appeared in several newspapers and websites. Strauss holds a B.A. in creative writing/professional writing and recently earned an M.A. in English literature.