According to the Internal Revenue Service, to claim exempt, you must have no tax liability for the previous tax year and expect the same for the current year. Your dependents play a large part in the amount your employer withholds from your paycheck and can affect your taxes, but do not determine whether you can claim exempt. In general, if you receive all of your income tax withholdings back as a refund, you are eligible to claim exempt.
Deductions and Your Tax Liability
When you file your taxes, for each dependent you claim, the IRS lets you deduct a certain amount from your taxable income, also known as an exemption. As of 2013, you can deduct an exemption rate of $3,900 for each dependent, yourself and your spouse from your taxable income. In addition, you can deduct a standard deduction, which is based on your filing status. When you file jointly with your spouse, you can deduct $12,200 from your taxable income. If you have enough deductions, your taxable income could drop to zero. At this point, you will not have income for the IRS to tax, and thus no tax liability. For example, for the 2013 tax year, a family of seven could earn $39,500 and not owe any tax because the standard deduction of $12,200 and exemption deduction of $27,300 reduces the taxable income to zero. If the same family earns $60,000, they will have a tax liability of $2,183.
Credits and Your Tax Liability
Deductions affect your taxable income, but tax credits reduce your tax liability dollar for dollar. Certain tax credits, such as the earned income credit, child and dependent care credit, education credits and the child tax credit, can significantly offset the tax you owe. For example, if a family of seven earns $60,000 and has a tax liability of $2,183, a child and dependent care credit of $3,000 will eliminate all tax liability.
Form W-4 assists you with calculating an appropriate number of withholding allowances and withholding rate. In most cases, you only have to complete one W-4, but if your marital status, family situation or finances change, you should complete a new form to change the amount of taxes your employer withholds.
There are three withholding rates available on Form W-4 -- single, married and married but withhold at the single rate. In most cases, if you withhold at the single rate, your employer will withhold more income taxes than if you withhold at the married rate. Single taxpayers typically owe more taxes on income because the IRS imposes a higher tax rate on a single taxpayer's income. If you claim married but withhold at the single rate, the IRS will withhold the same taxes as someone who claims single. This withholding rate is convenient if a taxpayer's spouse is self-employed or either spouse works more than one job.
As of 2013, for each withholding allowance you claim on Form W-4, your employer must disregard $75 of your income for a weekly payroll, or $150 for biweekly payroll. If you claim your five children, you and your spouse on your W-4, you can claim seven withholding allowances. This allows you to earn $525 a week, or $1,050 biweekly, before your employer imposes taxes. By claiming exempt, your employer will withhold no taxes, regardless of your income. If your income is significantly higher than your withholding allowance amount, you might owe a large tax bill at the end of the year.
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