Tax Exemption vs. Tax Deduction. What’s the Difference?

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Are you ever confused when your tax advisor says “take this exemption” or “let’s use this deduction?”

Don’t worry, you are not alone.

Most tax payers are not aware of the difference between a tax exemption and a tax deduction. I take pride in teaching you how to achieve financial peace in many different ways and this is one topic I’d love to explain to you.

Now let’s break down the difference between a tax exemption and a tax deduction!

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Difference Between Tax Deduction and Exemption


What is a Tax Exemption?

A tax exemption is a set amount of money that can be deducted from your adjusted gross income, reducing the taxable income. Exemption amounts are determined by inflation and are generally updated every year. Previously, you could deduct $4,050 for each personal exemption claimed in 2017.

[alert alert_heading=”NEW:” alert_text=”In 2018 personal exemptions are being eliminated; however, the standard deduction is being doubled. Back in 2017, the standard deduction for an individual was $6,350, plus a personal exemption of $4,050. The new reform now combines them into one standard deduction at $12,000 for individuals.” alert_style=”qua_alert_warning”/]

Read more about the new tax laws here.

There are four types of exemptions:

  1. Personal exemptions
  2. Exemptions for dependents
  3. Tax exempt organizations
  4. State/local tax exemptions


For the purpose of this post we’re going to focus on the first two mentioned.

Each person gets one exemption, but only one taxpayer can claim that exemption. For example, a divorced couple might share joint custody of a child, but only one parent can claim a tax exemption for that child.


Personal Exemption 

In the past you could claim a personal exemption for yourself, unless you were another person’s dependent. If you were married and filed a joint return, you could’ve claim an additional personal exemption for your spouse, but your spouse was never considered your dependent for federal income tax purposes.

To have claimed a personal exemption you must have been able to answer “no” to the intake question,

“Can anyone claim you or your spouse on their tax return?”

This applied even if another person does not actually claim you as a dependent.


Exemptions for Dependents

In the past you could’ve claim one exemption for each qualified dependent, thereby reducing the taxable income.
Two types of people qualify as your dependents: “qualifying children” and “qualifying relatives.” You could’ve usually claimed your natural or adopted children, stepchildren, foster children, sibling, or one of their descendants, provided they are under 19 years old (or under 24 years old if full-time student).


Tax Help


What is a Tax Deduction?

A tax deduction works by totaling your deductions and subtracting them from your adjusted gross income or AGI; therefore, reducing your tax bill for the year. Tax deduction is commonly a result of expenses, particularly those incurred to produce additional income.


2018 Standard Deduction

The standard deduction is a fixed amount set by the IRS that reduces your adjusted gross income; however, it is based on your filing status, which is determined by your marital status as of the end of the year.


For tax year 2018, the standard deduction amounts are as follows:


Single Filers

Standard Deduction$6,350.00$12,000.00
Deduction Increase $1600


Married Joint Filers No Dependents

Standard Deduction$12,700.00$24,000.00
Deduction Increase $3200


Married Joint Filers + 2 Dependents

Standard Deduction$12,700.00$24,000.00
Deduction Loss $4900


Head of Household + 2 Dependents

Standard Deduction$9,350.00$18,000.00
Deduction Loss $3500


Itemized Deductions

The IRS lets you decide whether you want to claim the standard deduction or itemize your deductions. Most people choose the standard deduction because it’s easier and may provide a greater deduction.

If your total itemized deductions exceed the amount of your standard deduction, then you’d probably want to go with the itemized deduction option. You’ll receive a bigger tax break with this option; however, it may be more work on the back end.

Most people like itemized tax deductions because they involve expenses you have to take on anyway, like your mortgage and property taxes.


Common Types of Itemized Deductions:

  • Mortgage Interest
  • Property Taxes
  • Charitable Donations (donating to Goodwill, tithing at church, giving money to non-profit organization, etc.)
  • Medical Expenses

5 Easy Tax Tips to Remember

  1. A spouse is never considered the dependent of the other spouse.
  2. Taxpayers who are divorced or legally separated at the end of the tax year cannot claim their (former) spouse
  3. Persons who can be claimed as a dependent may file a return for taxes withheld
  4. If your total itemized deductions exceed the amount of your standard deduction, then go with the itemized deduction option
  5. The standard deduction is fixed based on your filing status

Visit IRS for complete deduction vs. exemption information. I hope I was able to provide you with a quick guide to understanding the difference between a tax deduction and a tax exemption.


Don’t for get to grab your free Tax Preparation Checklist below!


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If you want more handy tax tips, then feel free to check out my latest articles here.  File your simple tax return here or sign up to get on the waiting list if you’d like to file with me.

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