Who doesn’t like tax exemptions and deductions? These are very appealing concepts that are available to the taxpayers so that they can keep more of their income themselves instead of giving it away to the state.
Simply put, the IRS (Internal Revenue Service) allows taxpayers to take out a specific amount of money from their taxable income. That is what tax exemption is all about. It all started back in the time when the Civil War was raging, and the United States government at that time decided that it will give a $600 tax exemption to all the taxpayers due to the consequences of the war.
History of Tax Exemption
As you can figure out, tax exemption has always been implemented when Congress realized its need. Let’s see some examples of those needs. In 1975, to help individuals and families that had low income, the earned income tax credit was introduced. It was so that the people would have more money for their day to day operations and expenses like groceries and gas. It was a time of severe inflation, and a tax exemption was ‘needed.’ Similarly, in 1997, Congress introduced the Taxpayer Relief Act which gave families a tax exemption of $400 per child. Again, this was to make sure that low-income families, as well as middle-income families, would have the proper support to run their homes comfortably.
Just like a tax exemption is given when needed, it could also be taken away if the government thinks that the people can do without it. Consider the tax reform bill that was passed in December 2017. This bill dismissed the previously instated personal tax exemption of $4,050. There were other changes as well that need to be considered, like the portability tax exemption, federal estate taxes, and gift taxes.
How many of these exemptions apply to you, and how much money you can save is totally up to you. The more exemptions you can claim, the more money you will save.
Exemptions, Deductions, Credits
If you have been researching for tax exemptions, you must have come across the other two terms as well: tax deduction and tax credits. If we get down to the basics, we will see that all three of them, tax exemptions, tax deductions, and tax credits, are trying to save your money from leaving your hands. The difference is in the way they work. Let’s see each of these briefly.
As we have discussed before, based on your tax filing status and the number of dependents that you have shown, you can save a lot of money through tax exemptions.
Tax deductions allow you to reduce your taxes for one year. You can do it by focusing on various activities and items like traveling, office and student loans, and such.
A tax credit is the amount of money that you can subtract from the overall tax that you have to pay to your government. The big difference here is that tax exemption and deductions lower your amount of taxable income while tax credits lower the amount of tax that you have to pay.
How to Gain Tax Exemptions
Coming back to our topic, individuals, groups, as well as non-profit organizations, can take a lot of advantage of tax exemptions if they know what to do. For example, if you have a charity or if you run a church, then you are in luck as you are completely tax-free. Federal tax is for others, not you. If you are an investor and you have purchased some municipal bonds, then you can claim tax exemption on the amount of interest, which is the profit that you make, that you get from those municipal bonds.
Personal Tax Exemptions
Almost every taxpayer out there can get tax exemption on one thing or another. If you have a spouse and both of you are filing your taxes together, then your spouse will have the facility of tax exemption that you can fill out in the same tax form.
If you have a family, then the IRS enables you to get one tax exemption for each of the family members that you have shown as your dependents. Even if they file for tax returns in the same year as you, you can still claim them on your tax forms. In addition to that, you can get further exemptions for all the family members that you have, including your children. There are some terms for that which have to be followed for you to get the benefit of these exemptions. These terms are, among others, that the family member or the child that you are showing as your dependent have to be living in your house for at least six months, or their ages must be less than 17.
Depending on the number of exemptions that you are claiming, you can charge different amounts on it.
Also, as we mentioned, churches, non-profit groups, and charities are exempt from taxes and if you are someone who donates to any of these groups, you are eligible for a tax deduction too. Other groups and organizations that are exempt from taxes are clubs, veteran groups, and trade associations.
So, if you are running one of these organizations, then you have complete control over your money, and you don’t have to pay a single dollar as tax. But even if you are an individual, there are exemptions that you can claim and save yourself a pretty penny.