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 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.
- 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.
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