Almost everybody in America has to pay federal income tax every tax year. But there are some cases in which you can claim a federal income tax exemption.
In this blog post, I will shed some light on who can claim a federal income tax exemption.
Key Takeaways
- Low-income taxpayers are exempt from paying federal income tax.
- U.S. citizens and U.S. resident aliens working abroad may not have to pay federal income tax.
- Non-profit organizations are exempt from federal income tax.
- Claiming federal tax exemption if you don’t qualify can get you a penalty.
I’ve looked into the rules for U.S. resident aliens for quite some time since I moved to the U.S. from Germany 5 years ago. Sure, this is the other way around, but it is similar.
I might plan to work in a different country at some point. In such a case, I might have to know about these rules.
Non-Profit Orginazations And Federal Income Tax Exemption
As a Non-Profit Organization, you do not drive a profit in your business beyond what you need to run your business. The Internal Revenue Service defines the rules in Internal Revenue Code Section 501(c)3.
Examples of Non-Profit Organizations that qualify as a tax-exempt organization include charitable organizations, universities, hospitals, and homeless shelters.
If your business qualifies, you can claim a federal income tax exemption.
U.S. Citizen Working Abroad
If you are working abroad, some criteria can allow you to claim a general income tax exemption.
In the tax year 2022, you could earn up to $112,000 in taxable income before you are required to pay federal income tax. That limit was increased to $120,000 yearly income in 2023. In 2024, it got increased again to $126,500.
There are some additional requirements american taxpayers need to meet to qualify:
- U.S. citizen: You need to be a resident in the country for the entire tax year
- U.S. resident alien: If you are a citizen with which the United States has an income tax treaty, you need to be a resident in the country for the entire tax year
- U.S. citizen & resident alien: You need to be physically present in that country for at least 330 full days during any 12-month period
You should check the requirements in the appropriate IRS publication since changes can be made at any time. You can claim a federal income tax exemption if you qualify by these rules.
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Low-Income Taxpayers And Federal Income Tax Exemption
You don’t have to pay federal income taxes with less taxable income than the standard deduction. Your taxable income is the part of your gross income you pay taxes on.
Over the years, that standard deduction has changed quite a bit. It recently increased to $29,200 for married couples filing jointly (single taxpayers and married filing separately $14,600).
Take a look at the changes made to the standard deduction based on the filing status:
In 2018, the TCJA, or Tax Cuts and Jobs Act, made some wide-ranging changes to many taxes. This also had an effect on the standard deductions you can claim.
Deductions And Federal Income Tax Exemption
You might also qualify for a Federal Income Tax exemption if you have many tax deductions. An example is if you have large medical bills. You can claim them on Schedule A (2023) as an unreimbursed medical expense.
You can claim a federal income tax exemption if your taxable income falls below the threshold.
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Dependents And Federal Income Tax Exemption
If you are a lower-income taxpayer with dependent children, you might qualify for a federal income tax exemption.
You will need to qualify for the Earned Income Tax Credit (EITC) for that to work. If you do, you can use these tax credits to lower your income taxes.
Keep in mind that this is a refundable tax credit. This means that you can still receive a refund, even if you don’t owe any taxes.
How Do You Claim A Federal Income Tax Exemption?
You must fill out IRS Form W-4 with your employer to claim a federal income tax exemption. This form tells your employer how much federal withholding he should make for your federal taxes.
Your employer will still deduct social security and medicare taxes from your paycheck. Your exemption just covers the federal income tax withholding of the current year.
In the past, I’ve done that digitally in services like Gusto. These services allow you to file such forms in a matter of minutes.
If your situation changes during the year, you can simply file a new Form W-4 at any time to make adjustments. You don’t need to start a new job to do that.
Even if you claim a federal income tax exemption, there might still be state or local taxes depending on your state. It is important to know these rules too.
What Happens If You Claim An Exemption Without Being Eligible?
There are a few things you can expect in such a case.
At first, you can expect a large tax bill after filing your tax return for that tax year. The second thing you can expect during tax time is a penalty if you don’t have a reason for the tax exemption.
Final Thoughts – Who Can Claim A Federal Income Tax Exemption?
We have covered 5 different groups that are exempt in certain situations: Non-Profit Organizations, U.S. Citizens and resident aliens working abroad, low-income taxpayers, taxpayers with large deductions, and taxpayers with many dependents.
Knowing if you qualify for a federal tax withholding exemption before claiming it can save you some trouble with the IRS come tax season.
Lastly, I want to highlight again that there are also state and local taxes to take into account. This blog post only covers the federal tax portion. It is important to know the rules in your state too.
Disclaimer: The information in this blog post should not be considered tax advice or a replacement. They are solely provided for informational purposes. Understanding the tax code is a difficult task. Please consult with a tax professional for any specific questions on your tax situation.
