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 taxpayers 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 a tax deduction with couple giving accountant permission to get tax info

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.

NEW ALERT: In 2018 personal exemptions were 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.

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.

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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 have claimed 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 applies even if another person does not actually claim you as a dependent.

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Exemptions for Dependents

In the past, you could have claimed one exemption for each qualified dependent, thereby reducing the taxable income.

Family of Five taking advantage of the EIC Earned Income Tax Credit

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, siblings, or one of their descendants, provided they are under 19 years old (or under 24 years old if full-time student).

State Tax Exemptions

Many states offer additional exemptions beyond the federal level.

For example, Florida provides a homestead exemption which can exempt up to $50,000 of the assessed value of a primary residence from property taxes.

New York offers a $1,000 exemption for each dependent child. Checking your own state’s tax code can uncover tax-saving exemptions.

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.

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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.

2023 Standard Deduction and Personal Exemption
2023 Standard Deduction and Personal Exemption (Estimate)
Filing StatusDeduction Amount
Single $13,850
Married Filing Jointly $27,700
Head of Household $20,800
Married Filing Separately $13,850
Personal Exemption Eliminated
The Tax Cuts and Jobs Act of 2017 eliminated personal exemptions, which were previously $4,050 per person.

You can view the Standard Tax Deduction table here.

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 organizations, etc.)
  • Medical Expenses
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5 Easy Tips to Remember for Your Tax Deduction

  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

Key Differences Between Exemptions and Deductions

  1. Exemptions reduce taxable income unconditionally, while deductions reduce total income conditionally based on meeting eligibility criteria.
  2. Exemptions are excluded from taxable income, but deductions are subtracted after being included in total income.
  3. While exemptions reduce taxable income directly, deductions reduce total income, which in turn lowers taxable income.
  4. Historically, exemptions were fixed amounts per person, while deductions varied based on expenses.
  5. Exemptions benefitted lower-income families more as they reduced taxable income for all filers equally.
  6. Deductions provide more benefits to higher-income filers in higher tax brackets.

Let’s Wrap This Up

Visit the 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.

personal exemption and tax deduction
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If you want more handy tax tips, then feel free to check out my latest articles here.  You can sign up to get on the waiting list if you’d like to file with me.

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Until the next money adventure, take care!


The Handy Tax Guy Tax Service

Disclaimer Statement: All data and information provided on this site is for informational purposes only. The Handy Tax Guy makes no absolute representation of the correctness, mistakes, omissions, delays, appropriateness, or legitimacy of any information on this site. **Note: Each client circumstance will vary on a case-by-case basis**

(Original Article Date: September 21, 2015/Updated September 13, 2023)

Nikida Metellus

Nikida Metellus is a financial freedom advocate, author, and the reimagined voice behind, now focused on helping you achieve a debt-free life and financial success. Based in Orlando, Florida, she combines her love for theme parks with actionable financial strategies, offering a unique perspective on balancing fun and finances. As the author of Complete Tax Planning Guide, she has now expanded her expertise to guide you on the road to financial freedom. Co-founder of Bramework and a coffee enthusiast at heart, Nikida is committed to empowering you with practical tips and insights to manage your money wisely. When she's not blogging or exploring Florida's attractions, she enjoys quality time with her husband and two daughters. Welcome to your journey toward a financially free life!