What Is an Exemption?
An exemption reduces the amount of income that is subject to federal income tax. Historically, taxpayers could claim personal exemptions for themselves and dependents, lowering taxable income dollar-for-dollar. The Tax Cuts and Jobs Act (TCJA) suspended the personal exemption for tax years 2018–2025 and replaced much of its effect with larger standard deductions. Other types of exemptions and exempt income (for example, certain municipal bond interest or qualified HSA distributions) still exist.
Key takeaways
– An exemption lowers taxable income; it is different from a tax credit.
– The TCJA repealed the personal exemption through 2025; the standard deduction was increased instead.
– Dependents and certain categories of taxpayers can still affect tax liability through dependent rules, credits (Child Tax Credit), and other exemptions.
– Some income is statutorily tax-exempt (e.g., most municipal bond interest, qualified HSA distributions, qualified Roth distributions).
– Employees can request exemption from income tax withholding from their employer only if they meet strict “no tax liability” conditions.
How exemptions work (basic mechanics)
– Taxable income = gross income − adjustments − deductions (standard or itemized) − exemptions (when allowed).
– Before 2018 and through 2025 the personal exemption existed and reduced taxable income by a fixed amount per exemption claimed. The TCJA suspended that personal exemption, so most taxpayers now rely on the standard deduction or itemized deductions.
– Other exemptions and tax exclusions (specific types of exempt income or targeted exemptions) remain available and reduce taxable or reportable income per statute or regulation.
Personal exemptions (status after TCJA)
– Pre-TCJA: taxpayers could claim a personal exemption for themselves and for a spouse (if not claimed as a dependent by someone else). For tax year 2017 and earlier this reduced taxable income by a set dollar amount per exemption.
– Post-TCJA: the personal exemption was suspended for tax years 2018–2025. Instead, standard deductions were increased. If Congress does not act, the personal exemption could return in 2026 (or be permanently changed). Always check current law.
Dependent exemptions and qualified dependents
– A dependent is someone who relies on the taxpayer for support. Dependents can be:
– Qualifying child: generally a child, stepchild, foster child, sibling, or descendant who meets relationship, age, residency, support, and joint-return tests.
– Qualifying relative: broader class that can include parents, other relatives, or nonrelatives who meet gross-income and support tests.
– Only one taxpayer can claim a given dependent in a year. If multiple people could claim a dependent, the IRS tie-breaker rules determine who is eligible.
– Dependent status affects eligibility for credits (e.g., Child Tax Credit, Earned Income Tax Credit) and whether the dependent can claim their own personal exemption (pre-TCJA). Today, dependent status mainly affects credits and filing rules.
Other types of exemptions and tax-excluded income
– Tax-exempt income (examples):
– Interest on most municipal (“muni”) bonds is exempt from federal income tax (see issuer-specific rules for state tax treatment).
– Qualified distributions from Roth IRAs and Roth 401(k)s are tax-free if rules are met.
– Distributions from Health Savings Accounts (HSAs) used for qualified medical expenses are tax-free (nonqualified uses are taxable and may incur penalties).
– Gifts up to the annual exclusion are excluded from the recipient’s income (annual exclusion: $16,000 in 2022; $17,000 in 2023 — indexed for inflation).
– Exemptions for special categories: some nonprofit entities or foreign-earned income exclusions (for qualifying U.S. citizens/residents abroad) can reduce taxable income under specific rules.
Exemption from withholding
– Employees whose total tax liability is zero (based on last year’s tax and expected this year) may claim to be exempt from federal income tax withholding. If eligible, the employee writes “Exempt” on the Form W-4 and provides it to the employer. This does not exempt the employee from Social Security or Medicare taxes, which are still withheld.
– Wrongly claiming exempt can create underwithholding and a tax bill with possible penalties. Follow current IRS guidance and the W-4 instructions.
Fast facts (summary numbers and points)
– Standard deduction examples (from source years; these are indexed annually — always verify for current year):
– Tax year 2022: single $12,950; head of household $19,400; married filing jointly $25,900.
– Tax year 2023: single $13,850; head of household $20,800; married filing jointly $27,700.
– Child Tax Credit was increased under the TCJA (and expanded temporarily by later legislation); rules and amounts have changed over time—check current IRS guidance for the applicable year.
– The personal exemption was $4,050 per person for tax year 2016 (illustrative of pre-TCJA amounts) and phased out at higher incomes then; it is suspended 2018–2025.
Practical steps for common taxpayer situations
1) If you’re deciding whether to itemize or take the standard deduction
– Step 1: Add up potential itemized deductions (mortgage interest, state & local tax up to limits, charitable contributions, medical expenses above the AGI threshold, etc.).
– Step 2: Compare the total to your standard deduction for your filing status (check IRS Publication 501 or IRS.gov for the current year’s amounts).
– Step 3: Choose the larger deduction. Consider future-year planning (bunching charitable gifts or medical expenses can make itemizing more favorable some years).
2) If you think someone is your dependent (or you want to claim a dependent)
– Step 1: Apply IRS tests for a qualifying child or qualifying relative (relationship, residency, age, support, gross income where applicable). See IRS Publication 501 for detailed tests.
– Step 2: Make sure only one taxpayer will claim the dependent—resolve tie-breaker situations before filing.
– Step 3: Obtain a valid Social Security number (SSN) or ITIN for the dependent; you generally cannot claim a dependent without a taxpayer ID.
– Step 4: Claim applicable credits (Child Tax Credit, other dependent credit) when filing; keep records supporting dependency and support provided.
3) If you want to adjust withholding or claim exemption from withholding
– Step 1: Use the IRS Tax Withholding Estimator (IRS.gov) or the worksheets on Form W-4 to estimate your tax and appropriate withholding.
– Step 2: Complete a new Form W-4 and give it to your employer. To claim “exempt,” you must meet the IRS criteria (no tax liability last year and expect none this year). If claiming exempt, write “Exempt” in the space on the W-4.
– Step 3: Revisit withholding after major life changes (marriage, new dependent, second job, large changes in income) to avoid under- or over-withholding.
4) If you have potentially tax-exempt income (muni bonds, HSAs, Roths, gifts)
– Step 1: Confirm the statute or plan rules that make the income exempt (e.g., municipal bond interest, qualified HSA distributions, qualified Roth distributions).
– Step 2: Report required information on your tax return as instructed (some tax-exempt income is reported on returns though not taxed; others require specific forms).
– Step 3: Keep documentation (bond statements, HSA receipts for qualified medical expenses, Roth contribution/withdrawal records, gift letters) in case of IRS questions.
5) If you’re unsure about dependent eligibility, exemptions, or credits
– Step 1: Review IRS Publication 501 (Exemptions, Standard Deduction, and Filing Information) and Publication 969 (HSAs) as applicable.
– Step 2: Use IRS online tools (Withholding Estimator, Interactive Tax Assistant) for immediate questions.
– Step 3: Consult a tax professional for complicated situations (multiple families claiming the same child, nonresident alien dependents, foreign-earned income, or large tax-exempt investments).
Where to confirm current rules and amounts
– IRS Publication 501: exemptions, standard deduction, and filing information.
– IRS Form W-4 and “About Form W-4” pages for withholding rules.
– IRS Publication 969 for HSA rules.
– IRS pages on tax-exempt bonds and Roth rules.
– For changes to law, the underlying statute for TCJA: H.R.1 (Tax Cuts and Jobs Act) and later legislation.
Selected sources and further reading
– IRS, Publication 501: Exemptions, Standard Deduction, and Filing Information.
– IRS, About Form W-4 / Topic No. 753 Form W-4 – Employee’s Withholding Certificate.
– IRS, Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans.
– IRS, tax-exempt governmental bonds guidance.
– H.R.1 – “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (Tax Cuts and Jobs Act).
– Investopedia, “Exemption” (summary and explanatory article).
Final notes
Tax law and numeric thresholds (standard deduction, gift tax annual exclusion, etc.) change frequently for inflation or legislation. This article summarizes general rules and examples drawn from recent years; always verify current-year amounts and requirements at IRS.gov or with a qualified tax advisor before filing.