Exemption vs Deduction
Exemptions and deductions are concepts that are associated with tax payments. All income earning citizens in a country are obliged to pay tax to the government depending on the income bracket into which they fall. This makes it very important for most individuals to understand the importance of the difference between these two concepts. The following article provides a clear picture of what each type of tax liabilities is, and how they are calculated.
Exemptions can help reduce tax liability. A tax payer can reduce tax using an exemption by requesting to reduce an equal to be deducted from tax payable for each person that is a dependent of the tax payer, which is called a dependent exemption. There are also personal exemptions, which apply only to the tax payer and their spouse. Exemptions are not based on the tax payers filing status and only a certain amount can be exempted; in United States, an amount of $3650 (as of 2009) can be exempted across the board. The people who are listed as dependants when filling for exemptions must fit a set of criteria, which include how they are related, their gross income, citizenship status, etc.
Deductions can also reduce a taxpayer’s tax liability, where an individual can deduct expenses that he incurs during the year. In making claims for deductions, the tax payer can select between two options: standardized deductions or itemized deductions.
A standard deduction would be reducing a standard amount that is already set by the Internal Revenue Service. This standardized amount will vary depending on whether the tax payer is married, single, widowed, married filing separate or married filing jointly. An itemized deduction allows the taxpayer to select expenses from a set list, where items can be added on for deduction depending on what they qualify for.
Deductions are also divided into ‘above the line’ and ‘below the line’. Below the line deductions are those deductions that do not fall into the set list of itemized deductions. Above the line deductions, on the other hand, are deductions that can be claimed regardless of which (standardized or itemized) method of deduction is used.
Exemption vs Deduction
Exemptions and deductions are similar to each other in that they are both able to reduce taxable liability for the tax payer. These two are, however, quite different from each other since exemptions is more personal and extends to the dependants of the tax payer, whereas deductions are based on the filing status of the tax payer. However, it is very important to understand the difference between these two since it will better allow the tax payer to manage his finances and to try and reduce the amount that is being taxed.
Difference Between Exemption and Deduction
• Exemptions and deductions are concepts that are associated with tax payments.
• Exemptions and deductions are similar to each other in that they are both able to reduce taxable liability for the tax payer.
• There are two types of exemptions, which can just extend to the taxpayer and their spouse or to all of the tax payer’s dependants.
• Deductions can also reduce a taxpayer’s tax liability, where an individual can deduct expenses that they incur during the year.