Tax Deduction Vs. Exemption

Each person is entitled to one exemption, but current tax law determines who gets to claim that exemption.

Each person is entitled to one exemption, but current tax law determines who gets to claim that exemption.

Every industry has its own jargon, and the income tax establishment is no different. Some of the terminology might have more than one meaning depending on its usage, and some terms might have similar meanings but different applications. For example, tax deductions and exemptions both reduce the amount of your taxable income, but they are applied to different areas of your tax form.

Exemptions

An exemption is a set amount of money the Internal Revenue Service allows you to subtract from your adjusted gross income based on the number of people in your household. Each exemption you claim for the 2012 tax year reduces your adjusted gross income by $3,700. There are two types of exemptions; personal exemptions and exemptions for dependents. Each individual gets one exemption, but only one taxpayer can claim that exemption. For example, a divorced couple might share joint custody of a child, but only one parent can claim a tax exemption for that child.

Personal Exemption

You can claim a personal exemption for yourself, unless you are another person's dependent. If you are married and file a joint return, you can claim an additional personal exemption for your spouse, but your spouse is never considered your dependent for federal income tax purposes.

Exemptions for Dependents

Two types of people qualify as your dependents: "qualifying children" and "qualifying relatives." You can usually claim your natural or adopted children, stepchildren, foster children, sibling, or one of their descendants, provided they are under 19 years old. The age limit is raised to under 24 years if the child is a full-time college student. You can also claim other relatives or individuals who lived as a member of your household, if you provided more than half of their support and their income was less than $3,700 for the 2012 tax year.

Standard Deduction

The standard deduction also reduces your adjusted gross income, but it is figured separately from your exemptions. Your standard deduction is based on your filing status, which is determined by your marital status as of the end of the year. If you file as single or married filing separately, as of 2012 your standard deduction is $5,950. If you file as married filing jointly or qualifying widow(er), your standard deduction is $11,900. If you file as head of household, your standard deduction is $8,400. The standard deduction is fixed based on your filing status, regardless of how many exemptions you claim.

Itemized Deductions

The IRS lets you decide whether you want to claim the standard deduction or itemize your deductions. Most people choose the standard deduction because it's just easier, and in most cases it provides a greater deduction. If your total itemized deductions -- which include things such as mortgage interest, real estate taxes, uninsured casualty losses and a portion of your medical expenses -- exceeds the amount of your standard deduction, you'll get a bigger tax break from itemizing, although it's more work.

About the Author

Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.

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