If I claim tax exempt and put all the money that would go to taxes into a savings account, would I just be able to pay my taxes at the end of the year instead?

15 This approach sounds logical in theory, but there are serious consequences to claiming exempt when you don't actually qualify for exemption. First, you can only legally claim tax exempt if you had no tax liability last year AND expect to have no tax liability this year. If you don't meet these requirements and claim exempt anyway, you're potentially committing tax fraud. Second, the IRS requires you to pay taxes as you earn income - it's called a "pay-as-you-go" tax system. If you don't have enough withheld throughout the year, you'll likely face underpayment penalties when you file. These penalties will almost certainly exceed any interest you might earn in your savings account. What you might consider instead is adjusting your W-4 to withhold just enough to avoid the underpayment penalty (generally 90% of your current year tax or 100% of your prior year tax). This way, you minimize what the government holds while avoiding penalties, and can put the rest in your savings account.

12 I tried something similar last year using the IRS Tax Withholding Estimator to reduce my withholding (not going fully exempt). I put that extra cash into a high-yield account with my online bank. The process was pretty straightforward - I fine-tuned my W-4 using the estimator at https://taxr.ai which helped me calculate exactly how much I needed to withhold to avoid penalties while maximizing what I could save. The tool analyzed my past returns and income patterns, then gave me precise W-4 instructions. I was able to keep about $400/month extra in my pocket throughout the year while still covering my tax obligations. By tax time, I'd earned almost $150 in interest I wouldn't have otherwise had.

19 Just wanted to update after trying taxr.ai that the other commenter recommended. I was skeptical at first but decided to give it a shot since the IRS calculator was giving me a headache. I uploaded my 2024 pay stubs and 2023 return, and it showed me exactly how to adjust my withholding to keep more money each paycheck while staying safe from penalties. Been using the new W-4 settings for about two months now, and I'm getting an extra $275 per paycheck that's going straight into my high-yield savings. The tool estimated I'll make about $230 in interest by tax time that I wouldn't have earned otherwise. It also clearly showed me that going fully exempt would have cost me about $600 in penalties, completely defeating the purpose. Definitely worth checking out if you're trying to optimize your withholding!

8 For anyone struggling to get through to the IRS about withholding questions (took me 3 days of calling), I finally had success using https://claimyr.com. You can see how it works here: https://youtu.be/_kiP6q8DX5c I had specific questions about my withholding calculation since I have both W-2 income and 1099 work. After days of busy signals, I was ready to give up. Claimyr got me through to an actual IRS agent in about 25 minutes who walked me through exactly how to calculate my estimated payments to avoid penalties while not overpaying. They explained how the safe harbor rules apply to my mixed income situation and helped me understand how much I needed to withhold from my W-2 job versus what I should pay quarterly.

18 I just wanted to follow up about using Claimyr that someone mentioned earlier. After my initial skepticism, I decided to try it because I was desperate to get some answers about my withholding situation before my company's deadline to submit W-4 changes. I was shocked when it actually worked exactly as advertised. I got a call back in about 40 minutes saying they had an IRS agent on the line. The agent helped me understand exactly how to calculate the minimum withholding needed to avoid penalties based on my specific situation (I have a side business plus my regular job). Turns out I was overthinking it, and the agent walked me through a much simpler calculation than what I was trying to do. Definitely saved me from making a costly mistake on my withholding. Worth every penny just for the time I saved not sitting on hold!

3 Be really careful with this idea. A friend of mine tried this exact strategy last year and ended up owing a $950 underpayment penalty. The interest he earned was only like $300 so he actually LOST money. Plus the stress of coming up with the full tax payment at once was way worse than he expected.

22 Has anyone tried using a tax-advantaged account instead? Like putting extra money in a traditional IRA or 401k to actually reduce your tax liability instead of just changing when you pay it? Seems like a better approach than just trying to earn a little interest while risking penalties.

18 I learned this the hard way - claiming exempt when you don't qualify is a red flag that can trigger an IRS audit. I tried something similar a few years back and got a letter from the IRS questioning my exempt status. Had to provide documentation proving I qualified (which I didn't), and ended up paying penalties plus interest. The safe harbor rule mentioned earlier is your best bet. You can use Form 1040-ES to calculate your required payments, or there's a simpler approach: take last year's total tax liability and divide by the number of pay periods. That's roughly what you need withheld per paycheck to avoid penalties. Also consider that while 2.5% APY sounds good, the underpayment penalty rate is currently around 8% annually. So even if you could legally claim exempt, you'd need to find an investment paying more than 8% just to break even on the penalty - and that's assuming you don't make any calculation errors.

I'd strongly recommend against claiming exempt unless you truly qualify. As others have mentioned, you can only legally claim exempt if you had no tax liability last year AND expect none this year - most people don't meet this criteria. A safer approach is to use the IRS withholding calculator or work with a tax professional to optimize your W-4. You can reduce your withholding to the minimum needed to avoid penalties (typically 90% of current year tax or 100% of prior year tax) and invest the difference. Keep in mind that even with a 2.5% APY, you're looking at maybe $200-400 in extra interest for most people, but underpayment penalties can easily exceed $500-1000. The risk/reward just doesn't make sense when there are legitimate ways to optimize your withholding without breaking tax laws. If you really want to maximize your money throughout the year, consider increasing 401k contributions or HSA contributions instead - these actually reduce your tax liability rather than just shifting when you pay it.