'Tax Exemptions' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Tax exemptions are special monetary exemptions that decrease the amount of income which is taxable. This can take the form of full tax exempt status that delivers 100 percent relief from a certain form of taxes, partial tax on certain items, or reduced tax rates and bills. Tax exemption can refer to particular groups such as charitable outfits (who receive exemption from income taxes and property taxes), multi-jurisdictional businesses or individuals, and even military veterans.
The phrase tax exemption is commonly utilized to refer to specific scenarios where the law lowers the amount of income that would fall under the taxable label otherwise. With the American Internal Revenue Service, there are two kinds of exemptions which are available to individuals. One example of a tax exemption concerns the decrease in taxes the IRS gives for any dependent children who are under age 18 (who actually live with the head of household income tax filer).
For the year 2015, the Internal Revenue Service permitted individuals who were filing taxes to receive a $4,000 exemption on every one of their permitted tax exemptions. This simply means that any individuals paying taxes who count on three permissible exemptions are able to deduct fully $12,000 off of their taxable income level.
In the cases where they make a higher amount than an IRS pre-determined threshold, the amount in tax exemptions which they are able to utilize becomes phased out slowly and finally eliminated completely. For the tax year 2015, those individuals filing taxes who earned in excess of $258,250, as well as those married filing jointly couples who earned more than $309,900, received a lower amount for their exemptions. This complicated sliding scale with seemingly random numbers in place is all part of the reason why observers claim the American tax system is outdated and overly complex.
There is an important caveat for individuals filing taxes. They can not claim their own personal exemption when someone else claims them as a dependent on their tax return. This is one of the elements that separate exemptions from deductions in the world of tax terminology. Each individual filing is permitted to claim his or her personal deduction.
Looking at a real world example helps to clarify the complicated rules. Young college students who have a job while they go to school will typically be claimed by their parents like a dependent on the parents’ income tax return. Since the parents are claiming them as a dependent, the students are not permitted to claim their own personal exemption. They can take the standard deduction however. This means that the students who earn $13,000 will be allowed to take the $6,300 standard deduction. This lowers their taxable income to $6,700. If their parents did not claim them, it would mean they were able to also claim the personal exemption, which would reduce their taxable earnings down to $2,700 (derived by subtracting the $4,000 exemption amount from $6,700).
In the majority of cases, individuals who file are also able to obtain a personal deduction for their husbands or wives. This does not apply if the spouse turns out to be claimed by their parents as a dependent on the parents’ tax return.
There are many scenarios where the dependents of an income tax filer prove to be minor aged children of the primary taxpayer. Regardless of this fact, individuals who pay their taxes may also have other kinds of dependents they can claim for exemption purposes against their income. These dependents are typically relatives of the payer in question, such as a child, parent, sister, brother, uncle, or aunt. They must be truly dependent on the person paying the taxes in order to live for the IRS to accept them as dependents for income tax filing purposes.
It is possible for a person to have no tax liability whatsoever thanks to the combination of personal deductions, personal tax exemptions, and exemptions and deductions for his or her dependents. When this is the case, these individuals are allowed to request an official exemption from withholding tax from their employers. When they do so, their payroll department will only withhold Social Security and Medicare contributions (but not income tax contributions) from their paychecks.