A tax exemption is a gift from the IRS…it’s chunks of your income on which you won’t have to pay any federal income tax. There are a few reasons for this, but the most common is the personal tax exemption. That’s because every taxpayer gets it! It’s just a certain amount of money which we all get to earn that’s not taxed.
If you are married, you also get a personal tax exemption for your spouse if you are filing jointly. Also, if you claim any dependents then you get personal tax exemptions for each dependent as well.
If you make too much money, however, the personal tax exemption gets phased out, the more you make. For 2013 the personal exemption phaseout starts at an income of $250,000. It’s completely gone if you make $372,500. So, between a quarter of a million dollars and $372,500 you get a partial personal exemption. That’s the nature of a phaseout.
If you are non-resident alien you can claim the personal exemption but not the spouse and dependent exemptions. However, if you are a on-resident alien and you’re married to a U.S. citizen or a resident alien then you may claim these personal exemptions if you have chosen to be treated as a resident of the U.S.
The Personal Tax Exemption & Your W4 Form
The W4 Form is where you claim your personal exemption. The personal exemption amount changes each year to keep up with inflation. The W4 is also where you would claim other allowances, like dependents. This will cause your employer to withhold less money from your future paychecks. If, when figuring your federal income taxes at the end of the year it turns out that you claimed too many allowances then you will just end up paying back the money that you received in your paycheck that should have been withheld.
For more on tax withholding visit the IRS website here.
In our democratic, egalitarian society, the idea is that each should pay his or her own fair share to keep the country going. For this reason our federal income tax is a progressive tax. That means the richer you are, the higher percentage of your income you will pay in taxes. At the other end of the spectrum, there are some taxpayers so poor that they will owe hardly any income tax, if any at all. How does this work? Partly through tax exemptions, which give taxpayers various breaks for things like being poor, having kids, etc. They can reduce or even totally remove tax liability.
Tax Exemptions on Your W4 Form
A tax exemption is also something you designate on your W4 form when you start a new job. You are telling your boss how much withholding to calculate for your future paychecks. There are some circumstances that exempt you from some withholding. The W4 is where you tell your boss about it so your paycheck is as accurate as possible.
For example, having a child is something you mark on your W4. You can claim a tax exemption this. You get one withholding allowance for each child.
How about those who are “exempt from withholding”? How does one get that nice status? It means your employer will not take any money out of your paycheck. You can claim exempt from withholding if you know you will have an IRS refund since you have no tax liability. You can also claim withholding if you had no tax liability last year either. Getting to the point where you know you have no tax liability is the tricky part.
Let’s take a look, one tax exemption at at time.
Is There a Tax Exemption for Me?
To answer your question: yes. Every taxpayer gets at least one tax exemption. It’s called the personal tax exemption. You get a mini exemption just for being you! You can also claim a spouse exemption if you are married and filing jointly. You can also claim tax exemptions for each dependent you have.
If you are a charity or other type of non-profit then of course you can apply for tax-exempt status. There’s a process for this, and a few hoops your organization must jump through to fulfill qualifications for tax-exempt status. To find out about these hoops, go to the IRS website’s page called How to Apply to be Tax-Exempt.