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As you may already know, the IRS issues tax refunds when you pay more tax during the year than you actually owe. When you file an exemption claim with your employer for federal tax withholding, you do not make any tax payments during the year. Without paying tax, you are not eligible for a tax refund unless you are eligible for a refundable tax credit, such as the earned income tax credit.
Tax law requires your employer to withhold federal income tax from each paycheck you receive and send it to the IRS on a quarterly basis. At tax time, your employer provides you with a W-2 form showing the total amount of taxes withheld during the year. When you sit down to do your taxes, if the taxes you owe are less than the total amount withheld, the IRS will send you a tax refund for the difference.
Generally, if you are self-employed and expect to owe $1,000 or more, you must make income tax payments quarterly throughout the year. If you have any questions, we have TurboTax Live self-employed tax experts available in English and Spanish to help you with your personal and business income and expenses. You can even simply hand over your taxes to a TurboTax Live tax expert who can do them from start to finish with TurboTax Live Full Service.
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Deposit exempt from withholding tax
When you start a job, your employer will ask you to complete IRS Form W-4. The W-4 helps you estimate the amount that should be withheld from each paycheck based on the tax information you provide. To claim an exemption from withholding tax, you must meet certain criteria. If you had even $1 of tax to pay the previous year or if you expect to earn more income than the sum of your standard deduction ($12,550 single, $18,800 head of household, $25,100 married filing jointly) , you may not be exempt from federal withholding tax in the current year.
For example, if you are filing as a single person on your 2021 taxes, you should not expect to earn more than the standard deduction of $12,550. If you are still claiming an exemption from withholding tax and earning more than that amount, you will likely owe taxes, unless you qualify for refundable tax credits like the Earned Income Tax Credit or the child tax credit.
Update your W-4
If you are unable to claim a waiver of withholding, you can always reduce the amount withheld from your wages by updating your W-4 and changing your withholding. There is a redesigned IRS W-4 now called the W-4 Employee Withholding Certificate instead of the W-4 Withholding Allowance Certificate which has been updated to reflect tax reform changes.
The IRS W-4 has been redesigned to align with tax reform changes and to help taxpayers determine their correct withholding tax after tax law changes. One of the most significant changes to Form W-4 was the elimination of personal allowances, as the allowances were tied to the dependent and personal exemption that was removed. The revamped W-4 will take into account whether you can claim the child tax credit and whether you can claim tax deductions other than the standard deduction, both of which can reduce your withholding tax.
Refundable tax credits
A refundable tax credit means that even if you don’t have to pay any tax before claiming the tax credit, you can still get a tax refund. Refundable tax credits not only reduce the federal taxes you owe, but can also result in a tax refund even if the tax credit is more than the tax you owe. For example, the US Opportunity Tax Credit which covers certain higher education expenses is 40% refundable and the Earned Income Tax Credit is fully refundable, so if you qualify for these tax credits, you can see a tax refund even if you paid no tax for the year.
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