What is an 'Exemption'

An exemption is a deduction allowed by law to reduce the amount of income that would otherwise be taxed. The Internal Revenue Service (IRS) offers two types of exemptions: personal and dependent exemptions. An example of an exemption is the reduction in taxes granted for dependent children (under the age of 18) living with the tax filer.

BREAKING DOWN 'Exemption'

As of 2015, the IRS allows tax filers to claim $4,000 for each of their allowable exemptions. For example, a taxpayer who has three allowable exemptions may deduct $12,000 from his taxable income. However, if he earns over a certain threshold, the amount of the exemption he can claim is slowly phased out and eventually eliminated. As of 2015, single tax filers earning over $258,250 and married taxpayers earning over $309,900 receive lowered exemptions.

Personal Exemptions

Tax filers may only claim a personal exemption if they are not claimed as a dependent on someone else's income tax return. This rule sets exemptions apart from deductions. Every tax filer is allowed to claim a personal deduction.

For example, imagine you are a college student with a job and your parents claim you as a dependent on their income tax return. Because someone else claims you as a dependent, you cannot claim the personal exemption, but you may claim the standard deduction. If you earned $12,000, you can claim the standard deduction of $6,300. That reduces your taxable income to $5,700. If you were also able to claim the personal exemption, your taxable income would be lowered to $1,700.

In most cases, tax filers may also claim a personal deduction for their spouses, as long as the spouse is not claimed as a dependent on another person's tax return.

Dependent Exemptions

In many cases, dependents are minor children of the taxpayer, but taxpayers may claim exemptions for other dependents as well. The IRS has a litmus test for determining who is considered a dependent, but in most cases, it is defined as a relative of the taxpayer (parent, child, brother, sister, aunt or uncle) who is dependent on the taxpayer for his support.

Exemption From Withholding

Employers withhold income tax from their employees and remit it to the IRS. However, if a person has no tax liability, he can request an exemption from withholding. This simply means that his boss withholds Medicare and Social Security contributions from his paycheck, but does not withhold income tax.

RELATED TERMS
  1. Exempt Income

    Certain types or amounts of income not subject to federal income ...
  2. Dependent

    An individual whom a taxpayer can claim for credits and/or exemptions. ...
  3. Personal Exemption

    The dollar amount that each individual taxpayer is able to deduct ...
  4. Deduction

    Any item or expenditure subtracted from gross income to reduce ...
  5. Qualifying Relative

    A federal income tax designation that allows a taxpayer to claim ...
  6. Tax Exempt

    To be free from, or not subject to, taxation by regulators or ...
Related Articles
  1. Taxes

    Are You Missing Out On These Tax Exemptions?

    To lower your tax bill, make sure that you're taking all the exemptions that apply to you.
  2. Taxes

    New Tax Rules Target The Top Tax Bracket

    The American Taxpayer Relief Act brings about new tax rules for the wealthy that people such as Warren Buffett have been calling for over the last few years.
  3. Taxes

    Taxing Times For Divorced Parents

    Find out how to deal with the tax issues that arise for divorced parents with dependent children.
  4. Financial Advisor

    Tax Time is Coming; Don't Be Caught Off Guard

    It's time to think about tax returns again. The good news is that the regulations in 2016 have not changed dramatically from last year.
  5. Taxes

    Six Ways Your Tax Preparer Knows You're Lying

    An experienced tax preparer can sense when a client is lying. Find out what sets off their lie detectors.
  6. Taxes

    What's IRS Form 1040 For?

    Most U.S. taxpayers will be familiar with the 1040. By the end of filling it out, you'll know how much tax you owe, or what your refund is.
  7. Retirement

    Top Tax Tips For Retirees

    Filing your taxes during retirement can be just as time consuming as when you were employed. We have some tips to help you out.
  8. Taxes

    8 States With Estate Taxes

    Understand the difference between the federal estate tax and state-specific estate taxes. Learn about some of the worst states with estate taxes.
  9. Financial Advisor

    These 13 States Tax Your Social Security Benefits

    It may surprise many that Social Security benefits are taxed. The best way to not let it derail your tax situation is to plan for it. Here's how.
  10. Taxes

    Next Season, File Taxes On Your Own

    Master these fundamentals and you'll be doing your own taxes with minimal stress.
RELATED FAQS
  1. How can I lower my effective tax rate without lowering my income?

    Discover how to reduce your effective tax rate without losing income by maximizing adjustments and deductions, earning tax-free ... Read Answer >>
  2. Who is exempt from paying Social Security taxes?

    Learn about the groups of people who qualify for exemption from Social Security taxes, and explore the process of applying ... Read Answer >>
  3. Is there any way to opt out of paying Social Security?

    Understand more about the purpose of the Social Security system and learn which groups of taxpayers are automatically exempt ... Read Answer >>
  4. What deductions, credits and exemptions depend on gross income calculations?

    Understand what deductions, exemptions and tax credits are dependent on the gross income calculation and how these determine ... Read Answer >>
  5. What property / belongings can I keep after filing bankruptcy?

    Discover which types of property you can keep after filing bankruptcy by listing them as exempt from normal liquidation proceedings. Read Answer >>
Hot Definitions
  1. IRS Publication 970

    A document published by the Internal Revenue Service (IRS) that provides information on tax benefits available to students ...
  2. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  3. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  4. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  5. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  6. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
Trading Center