What Does Claim Exemption From Withholding Mean

Being tax exempt means that some or all of a transaction, entity or person's income isn't subject to tax. A tax exemption is the right to exclude certain amounts of income or activities from taxation.

Being tax exempt or having a tax exemption seems like a way to lower your tax bill, but it can get you in trouble if you don't understand the difference between tax exemptions, exempt workers and tax-exempt status. Here's how those terms tend to appear in the wild and how you can make "exempt" work for you.

What does it mean to be tax exempt?

Being tax exempt means that some or all of a transaction, entity or person's income or business is free from federal, state or local tax. Tax-exempt organizations are typically charities recognized by the IRS. They're exempt from federal taxation (that is, they have tax-exempt status), and donations to them are typically tax-deductible .

Who is tax exempt?

For individuals, "tax exempt" often has three meanings.

1. Are you exempt from withholding tax?

You may be able to elect to have federal income tax withheld from your paychecks by changing your W-4 at work. Social Security and Medicare taxes will still come out of your check, though.

Typically, though, you can be exempt from withholding tax only if two things are true:

You expect the same thing to happen this year

2. Did you receive income that isn't taxable?

This is rare, because the Internal Revenue Code defines taxable income as gross income minus deductions. And gross income, federal law says, "means all income from whatever source derived." That's a lot of territory, covering earned income such as wages and unearned income from investments and other sources.

However, there are some types of income that typically aren't subject to tax. You can see a list here.

3. Are you exempt from minimum wage and overtime rules?

The Fair Labor Standards Act requires that most workers get paid at least minimum wage and overtime. However, some people in executive, administrative, professional and outside sales jobs are exempt from those rules.

The Labor Department uses a few tests to determine whether an employee is exempt from the minimum wage and overtime rules. They generally have to do with pay and job duties. Learn more on the department's website.

What is a tax exemption?

A tax exemption is the right to exclude certain amounts of income or activities from taxation. A few years ago, taxpayers were able to exclude $4,050 or more off their income by claiming personal exemptions. Personal exemptions no longer exist.

Send your tax refund straight to an IRA account

You can tell the IRS to put your tax refund right into an IRA by filling out IRS form 8888 when you file your taxes .

The difference between tax exemptions, tax deductions and tax credits

Tax exemptions aren't the same as tax deductions or tax credits.

Tax exemptions whittle down what counts as income in the first place; that is, exemptions usually come right off the top.
Tax deductions generally are expenses you've incurred that whittle down the amount of your income that's subject to tax.
Tax credits are dollar-for-dollar reductions in your tax bill.

Source: https://www.nerdwallet.com/article/taxes/what-are-tax-exemptions-and-how-do-they-work

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What Does Claim Exemption From Withholding Mean