Many people don't understand the terms "exemption" and "deduction," especially those without much experience doing their own taxes. However, the concepts of exemptions and deductions can save you thousands on your taxes and put more money back in your pocket, so here's what you should know about them for 2016.

What is a tax exemption?
A tax exemption simply means a reduction of taxable income. In the U.S. tax code, an exemption is treated separately from deductions, although the effect is the same thing -- income that's excluded from the taxable amount.

1040 form with money on top of it.

Image Source: Getty Images.

For the 2016 tax year, the personal exemption amount is $4,050. If you can't be claimed as a dependent on someone else's tax return, you can claim one personal exemption for yourself. If you're married and file a joint return, you can claim two exemptions -- one each for you and your spouse.

You can also take an additional exemption for each dependent you claim. Dependents may include, but are not necessarily limited to:

  • Your children, if they're under 19 years old, or under 24 years old if they're full-time students, provided that they don't provide more than half of their own financial support during the year.
  • Stepchildren.
  • Foster children.
  • Grandchildren whom you support financially.

For example, a married couple with two young children can claim a total of four personal exemptions, worth $16,200 in 2016.

For high-income taxpayers, the personal exemption is subject to a phase-out, depending on your income level and filing status.

Filing Status

The Personal Exemption Begins to Phase Out at AGI of ...

And the Personal Exemption Disappears Completely Above...




Married filing jointly



Head of household



Married filing separately



Data source: IRS.

Deductions: standard and itemized
Taxpayers have two choices when it comes to deductions: standard or itemized. The standard deduction is simply a set amount that any taxpayer is allowed to deduct, whether or not they actually had any deductible items at all. For 2016, the following standard deduction amounts apply.

  • $6,300 for single filers.
  • $12,600 for married filing jointly.
  • $6,300 for married filing separately.
  • $9,300 for head of household.

Itemized deductions refer to the actual amount of deductible items you have. If the total of all of your itemized deductions is more than the standard deduction amount, it's beneficial to itemize. If not, the standard deduction amount is the best bet. To help you estimate your itemized deductions, here is a list of some of the more popular deductions that are only available to itemizers.

  • Medical expenses in excess of 10% of AGI (7.5% if you're over 65).
  • Mortgage interest, property taxes, and mortgage insurance.
  • Points you paid to obtain a mortgage.
  • Charitable contributions.
  • Job search expenses.

The ability to itemize deductions phases out over the same thresholds as the personal exemption, or above AGI of $259,400 for single filers and $311,300 for married joint filers.

You should be aware that there are many possible deductions, so you should always calculate your itemized deductions using your tax-preparation software to determine which deduction method is best for you.

In addition, there are certain deductions you can take advantage of regardless of whether you itemize or take the standard deduction. These are often referred to as "above-the-line" deductions, and include:

  • Educator expenses.
  • Student loan interest.
  • Tuition and fees deduction.
  • Deductible retirement contributions, such as to a traditional IRA.
  • Moving expenses, as long as the move was related to the start of a new job.

How much can deductions and exemptions save you?
For many taxpayers, exemptions and deductions can result in zero taxable income. For the 2014 tax year, the average tax return had a total of $13,881 in deductions, on top of personal exemptions. And out of 148.7 million tax returns filed, just over 101 million had any tax liability whatsoever.

For a specific example, let's say you and your spouse earn $100,000 for 2016, and that you have two young children and another in college. We'll also say that you elect to use the standard deduction amount, and that you qualify for an additional $3,000 tuition and fees deduction as well as a deduction for $5,000 in traditional IRA contributions. This combination would reduce your taxable income as follows:





Personal exemptions for five people

$20,250 reduction

Standard deduction

$12,600 reduction

Tuition and fees deduction

$3,000 reduction

Retirement savings deduction

$5,000 reduction

Total taxable income


According to the 2016 tax brackets, a married couple with taxable income of $100,000 can expect income tax of $16,543 this year. However, with the deductions, this couple's new taxable income would result in income tax of just $7,945, a savings of $8,598. And this is before any tax credits they're entitled to, which could reduce their tax liability even further.