Many people don’t understand the terms “exemption” and
“deduction,” especially those without much experience doing
their own taxes. However, exemptions and deductions can save
you thousands on your taxes, and 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.
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
- 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.
- 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
For high-income taxpayers, the personal exemption is subject
to a phase-out, depending on your income level and filing
The Personal Exemption Begins to Phase Out at AGI of
And the Personal Exemption Disappears Completely
Married filing jointly
Head of household
Married filing separately
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
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
- Mortgage interest, property taxes, and mortgage
- 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
, as long as the move was related to the start of a new
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
Tuition and fees deduction
Retirement savings deduction
Total taxable income
According to the 2016
, 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.
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originally appeared on Fool.com.
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