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What to Know About Tax Exemptions

What to Know About Tax Exemptions

When it comes to taxes, every little bit helps. That’s why tax exemptions can be an important consideration for many taxpayers. Here’s what you need to know about tax exemptions and how they can help you keep more money in your pocket.

What are tax exemptions?

A tax exemption is a legal way to reduce the amount of taxes that you owe the government. It works by excluding certain types of income or expenses from your taxable income. The idea behind tax exemptions is to provide relief to taxpayers who face specific costs that affect their financial situation.

Tax exemptions come in many different forms, including those provided by the federal government, state governments, and local municipalities. Some common tax exemptions include exemptions for dependents, medical expenses, and charitable donations.

Exemptions vs deductions

It’s important to understand the difference between tax exemptions and tax deductions. While both can help reduce the amount of taxes you owe, there are important distinctions between the two.

Tax exemptions are a direct reduction of your taxable income, meaning that the income or expense itself doesn’t get taxed. Tax deductions, on the other hand, allow you to deduct certain expenses from your taxable income, meaning you are taxed on a lower income amount.

For example, if you have a tax exemption for a dependent child, that child’s income won’t be taxed at all. However, if you have a tax deduction for a medical expense, you’ll still pay taxes on your full income, but you’ll get to subtract the expense from that income, which will reduce your overall tax liability.

Federal tax exemptions

The federal government provides several tax exemptions to taxpayers. Here are some of the most important:

Exemption for dependents: If you have a dependent child or other qualifying dependent, you can claim an exemption on your federal taxes. For 2021, the exemption amount is $4,300 per dependent.

Personal exemption: The personal exemption is a set amount of income that you can exclude from your taxable income. However, the Tax Cuts and Jobs Act (TCJA) of 2017 eliminated the federal personal exemption starting in 2018 until it expires in 2025.

Standard deduction: The standard deduction is a fixed amount of income that you can deduct from your taxable income. For the 2021 tax year, the standard deduction is $12,550 for individuals, $18,800 for heads of household, and $25,100 for married couples filing jointly.

Health savings account (HSA) contributions: If you contribute to an HSA, those contributions are tax-deductible up to certain limits. For 2021, the limit is $3,600 for individuals and $7,200 for families.

State tax exemptions

Many states offer tax exemptions, although the types of exemptions and the amounts can vary widely. Here are some examples of state-level tax exemptions:

Property tax exemptions: Some states offer property tax exemptions for certain groups of people, like disabled veterans or senior citizens who meet certain income requirements.

Sales tax exemptions: Some states offer sales tax exemptions for certain types of purchases, like clothing or food.

Farm equipment exemptions: Some states have tax exemptions for farm equipment or other agricultural expenses.

Local tax exemptions

Local municipalities can also provide tax exemptions. Some common examples include:

Tax exemptions for solar panels: Some cities offer tax exemptions for residents who install solar panels on their homes.

Historic home exemption: Some cities offer tax exemptions for homeowners who have a designated “historic home”.

Military exemption: Some cities offer tax exemptions for veterans or active-duty military personnel.

How to claim tax exemptions

The process for claiming tax exemptions can vary depending on the type of exemption you qualify for. Here are some general guidelines:

Exemptions for dependents: The IRS allows you to claim an exemption for each qualifying dependent on your tax return. You’ll need to provide your dependent’s Social Security number, date of birth, and other identifying information.

Standard deduction: If you don’t itemize your deductions, you’ll automatically be able to claim the standard deduction on your federal taxes. However, if you want to claim a higher deduction by itemizing your deductions, you’ll need to provide documentation of your expenses.

State and local tax exemptions: Depending on the state or municipality, you may need to file a separate form or apply for the exemption before you can take advantage of it.

Limitations and changes to tax exemptions

It’s important to note that tax exemptions aren’t always guaranteed or permanent. Changes to tax laws or new regulations can impact the availability or amount of certain tax exemptions. For example, the TCJA of 2017 eliminated the federal personal exemption starting in 2018 until it expires in 2025.

Additionally, some tax exemptions have limitations or restrictions that may impact your ability to claim them. For example, the exemption for dependents begins to phase out if your income exceeds certain thresholds.


Tax exemptions can provide a helpful way to reduce the amount of taxes you owe, although they can be complex and subject to changes in legislation. If you think you may qualify for a tax exemption, it’s important to understand the requirements and limitations before you claim it. By taking advantage of available tax exemptions, you can help keep more money in your pocket and reduce your overall tax liability.

There are some individuals and businesses that may be tax exempt. For example, a member of the clergy may be exempt from paying taxes. On the same token, many Churches are tax exempt, as long as they meet certain criteria, which is determined by each jurisdiction. In addition, certain types of personal income are tax exempt. The Federal government has very concrete and specific guidelines as to tax exemptions. Each state makes specific and unique determinations regarding tax exemptions, on a state by state basis.

For example, retired or injured military personnel may be exempt from paying income tax in certain situations. Income that is compensation for an event, such as a lawsuit, may be exempt under certain circumstance. In some jurisdictions, businesses that move to a certain area, enjoy certain tax exemptions. Generally, areas that are experience economic difficulties, will utilize tax exemptions to encourage businesses to move to the area. Businesses in turn, provide jobs for local citizens that would otherwise be unable to find employment.

There are also tax exemptions based on the size of a family, or number of allowable dependents. For example, the average American family has two children, they can take two deductions based on expenses associated with those children. An average amount of an individuals income is assumed to have been used to support each dependent and it is exempt. Each individual tax payer is also entitled to take a tax exemption for themselves, as long as no one else uses them as a tax exemption. For example, an adult child that is ill, may be cared for by parents.

The parents would like take a tax exemption for that child, on their taxes. That is perfectly legal as long as no one else takes that person as an exemption, including the child themselves. In other words, a person cannot claim themselves as tax exempt, if another person as used them as a tax exemption.The amount of dependents used as a tax exemption, can greatly effect a family’s income tax responsibility. In order to utilize an independent towards a tax exemption, the dependent must live with the person that is claiming them as a dependent.

Tax exemptions can be utilized in several ways. Individuals and certain institutions, may be completely exempt from taxes. For example, churches and other non profits, are tax exempt. There are also certain factors that make a portion of income tax exempt. The number of dependants claimed by a tax payer, allows the amount of their income that is tax exempt to increase, with each dependent claimed. There are also many cases where certain portions of income is tax exempt, but factors regarding those scenarios, must match tax laws exactly, in order to be legitimately exempt.