One of the best ways to lower your tax bill is to qualify for a tax exemption. Some tax exemptions apply at the federal level, while others are at the state (and sometimes county or municipal) level.
What is a tax exemption?
A tax exemption reduces the amount of your income that is subject to taxes. It allows you to exclude some income from being taxed. Tax exemptions are similar to tax deductions, but they usually have fewer restrictions.
There are two primary types of tax exemptions for individual taxpayers with U.S. federal income taxes:
- Personal exemption: These tax exemptions allow taxpayers to claim themselves and often their spouses to reduce their taxable income by a set amount. The Tax Cuts and Jobs Act of 2017 reduced the personal exemption for federal income taxes to $0 from 2018 to 2025.
- Dependent exemption: These tax exemptions allow taxpayers to reduce their taxable income by a set amount for each dependent (i.e., qualifying child or relative). The Tax Cuts and Jobs Act of 2017 reduced the dependent exemption to $0 from 2018 to 2025.
Several states allow personal and dependent exemptions with their state income taxes. Some states provide tax exemptions for seniors, those with disabilities, and veterans.
Some state, county, and municipal governments also allow tax exemptions for some businesses (for example, exempting the business from property taxes) in an effort to boost their economies. The U.S. government and many states also provide full tax exemptions for charitable and religious organizations.
Why tax exemptions are important
Tax exemptions are important for individuals because they lower the total amount of taxes paid, resulting in taxpayers having more money to spend.
Governments use tax exemptions to stimulate the economy by increasing the disposable income for individuals or businesses. Tax exemptions also have the benefit of being simple to administer.
What to do to take advantage of tax exemptions
Individual taxpayers don’t have to do anything special to qualify for the most common tax exemptions. You’ll just need to be sure to correctly specify any exemptions for which you qualify when you complete your tax filings.
Professional tax preparers should be able to ensure that you take advantage of any tax exemptions. Many tax preparation software applications will also help you correctly specify any exemptions for which you’re eligible.
How tax exemptions can lower your tax bill
Since personal and dependent exemptions have been set at $0 through 2025 for federal income taxes, tax exemptions won’t help lower your federal tax bill anytime soon. However, they could help depending on which state you live in.
For example, New Jersey residents can claim a $1,000 regular personal exemption. This exemption applies even if another person claims them as a dependent. A New Jersey taxpayer who is age 65 or older can also claim an additional $1,000 tax exemption. Military veterans in the state who received honorable discharges (or were released from active duty “under honorable circumstances”) can claim an additional $1,000 tax exemption as well, as can anyone who is blind or disabled.
Suppose you’re a military veteran who is 66 years old and lives in New Jersey. You could claim the $1,000 regular personal exemption, a $1,000 exemption for your age, and a $1,000 exemption as a veteran. If you made $50,000 in a year from working, your taxable income would be reduced by $3,000 to $47,000 right out of the gate.
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