Tax-exempt — is there a more beautiful hyphenated adjective in the English language? Since the very first income tax was collected in 1913, the U.S. tax code has included special exemptions for individuals and organizations in order to lower their tax burden.
Let's start by defining what is and isn't a tax exemption.
Tax exemptions are not the same as tax deductions, even though they accomplish the same thing: lowering your taxable income. To further confuse things, exemptions and deductions sit right next to each other on the 1040 tax form (lines 40 and 42). So how exactly are they different?
- Tax exemptions represent a fixed amount that can be claimed by all taxpayers on behalf of themselves, their spouses and dependents.
- Deductions, on the other hand, are different from taxpayer to taxpayer. They vary depending on your filing status if you claim the standard deduction, or the nature of your personal and business expenses if you itemize your deductions.
Over the years, Congress has recognized certain types of taxpayers and certain types of organizations as tax-exempt. Organizations have to apply for tax-exempt status, but people may qualify depending on how much money they make, whether they are foreign students and other criteria.
Keep reading to find out if you could use tax exemptions to save even more money on your income taxes.