What is a Tax Exemption and How do I Get One?

What is a Tax Exemption and How do I Get One?

Ha ha- that’s kind of a joke.  Even if you know nothing at all about taxes and the IRS, you can kind of tell that a tax exemption is something you might be interested in getting for yourself.  So…what is a tax exemption and how do I get one?

What is a Tax Exemption?

Being exempt from something means you don’t have to have anything to do with it.  For example, at my job everyone has to fill out a daily log describing what projects they worked on that day.  Nobody likes.  I am exempt because I am a manager.  Nice!  I don’t have to participate.

Same with a tax exemption.  It means you don’t have to pay a certain tax, or your obligation to pay a certain tax is greatly reduced.  In the case of federal income taxes with the IRS, tax exemptions will reduce your taxable income.  That means lower tax bill or greater refund, whichever case you may be.

How Do I Get a Tax Exemption?

When you file your federal income tax return you will claim certain tax exemptions.  Everyone gets at least one!  Each tax exemption is worth a few thousand dollars knocked off your total taxable income.  For tax year 2012, each tax exemption was worth $3,800.  You automatically get the personal tax exemption.  You can also get one for your spouse if you are married filing jointly.  Let’s take a look at the other types of tax exemptions.

Types of Tax Exemptions

  1. The Personal Tax Exemption.  Already mentioned this one: you get it automatically.  You can also take one for your spouse if your filing status is married filing jointly.
  2. Dependent exemptions: these are usually your kids.  Dependents can also be elderly relative that you support, living with you.  You get a tax break for each dependent.  Make sure you fully understand who counts as a dependent and who doesn’t though.  Go to the IRS website’s dependent page here to find out more.  You can also find out more about exemptions with Publication 501.
  3. Other types of exemptions: gift tax exemption, property tax exemption, estate tax exemption for example.  These would be situations where you get a certain amount of gift or estate income tax free before you start getting taxed on it.  Ideally, your gift amount falls below the gift tax exemption amount.  But more on this later.
  4. Tax exemptions for religious organizations.  This is harder to come by since you need to be a recognized church and not many people can claim this.  Religious organizations are tax-exempt.