Claiming "exempt" on a W-4 form prevents any federal income tax from being withheld from an employee's pay. Taxpayers can elect to claim "exempt" from taxes if they had a right to all of the money they paid in via federal tax the previous year because they had no tax liability. They expect a refund of all federal income tax because they don't plan to have any tax liability.
Notably, taxpayers who are 65 or older, who are blind, or who can be claimed as dependents on the tax return of another can claim to be "exempt" from tax withholding on a W-4. Those who itemize deductions or who claim tax credits or dependents cannot be exempt from tax deduction, according to the IRS.