Who Qualifies for Tax Exemptions?

The U.S. tax code provides tax exemptions that allow taxpayers to reduce their taxable income and, thereby, pay less in taxes. Over the years, the IRS has eliminated certain exemptions and added others.

For example, the 2017 Tax Cuts and Jobs Act (TCJA) eliminated most personal and dependent exemptions starting in 2018. In its place, the TCJA created the standard deduction for individual taxpayers to replace the eliminated exemptions. In addition, the act provided for a higher child tax credit to replace the eliminated dependent exemptions.

While most individual tax filers are no longer eligible for exemptions, nonprofit organizations and businesses are still generally exempt from the federal income tax. Donations to these exempt organizations are usually tax deductible for the tax year in which the taxpayer made the charitable contribution.

Many state and local governments also offer tax exemptions to nonprofits and businesses in specific fields to stimulate their economies.

Here, we'll discuss federal tax exemptions and how they may impact your tax return. Consider the FindLaw articles in our “Helpful Links" section, or consult a tax professional for more information.

Tax Exemptions vs. Tax Deductions and Credits

Unless you're a tax law attorney or accountant, you may not know the differences between tax deductions and tax exemptions. Or confuse tax exemptions with tax credits. It's crucial to understand how these things work if you want to maximize your tax refund.

When you file your federal income tax return, you must account for your taxable income. This is how the IRS determines how much tax you owe. Of course, few people (if any) pay taxes on their total gross income. Before calculating your tax liability, you'll want to take advantage of every opportunity to reduce your taxable income.

The best way to reduce your taxable income is to claim every tax deduction, exemption, and credit available. Since tax rates go down with income levels, you can actually change your tax bracket, which can save you thousands of dollars.

Tax Deductions

Tax deductions are precisely what they sound like — money you deduct from your total gross income. There are all sorts of tax deductions. Some of the more common ones include:

• Property tax
• State taxes/ local taxes
• Mortgage interest
• Real estate tax
• Charitable contributions
• Medical and dental expenses
• Student loan interest
• Local sales taxes
• Home office expenses

Whether you qualify for specific deductions depends on your situation.

For example, imagine you earned $100,000 in 2024 and paid $5,000 in mortgage interest. You can deduct $5,000 from $100,000 and reduce your taxable income from $100,000 to $95,000.

Tax Credits

Tax credits are significantly different from tax deductions. With a tax deduction, you get to deduct a certain amount of income from your taxable income. With tax credits, you can deduct a specific amount of taxes owed.

Some of the more common tax credits include the following:

• Self-employed health care premiums
• Solar tax
• Adoption expenses
• Lifetime learning education credits
• Retirement plan contributions
• Child and dependent care credits

Imagine that you still earned $100,000. Your taxes come out to be $28,000. But you also paid $5,000 in child and dependent care. According to IRS rules, you can deduct $5,000 from your tax of $28,000. Instead of owing $28,000 in taxes, you will only owe $23,000.

Tax Exemptions

Tax exemptions are different from both tax deductions and tax credits. Tax exemptions represent things you otherwise would have had to pay taxes on. For example, you usually have to pay income for any profit you enjoy from selling your home. However, the Internal Revenue Service offers a tax exemption for capital gains that can significantly reduce your tax bill.

The tax code spells out the specific tax exemptions. The most common of these include:

• Child based income
• Some Social Security benefits
• Veteran's benefits
• Capital gains tax
• Local and state investments (i.e., municipal bonds)
• Health savings account withdrawals
• Certain 401K and Roth IRA distributions

There are also tax-exempt entities. These are qualifying individuals and entities that do not have to pay income tax because of theirtax-exempt status. These are typically nonprofit organizations such as churches, shelters, and other entities that do not operate for profit.

Individual Tax Exemptions

Before 2018, you could claim exemptions for yourself, your spouse, and your dependents. However, if you claimed an exemption for a dependent (such as your child), they could not claim a personal exemption on their tax return.

As discussed above, these tax exemptions were eliminated by the Tax Cuts and Jobs Act. But, that doesn't mean you lose these exemptions altogether. You may be entitled to other credits and exemptions to help make up the difference in your taxable income.

Personal Exemptions May Return

The TCJA did not permanently change the tax code. In fact, many of its provisions expire at the end of 2025. Unless Congress extends the TCJA or passes additional legislation, the Internal Revenue Code will revert to its 2017 language for the 2026 tax year.

Exempt Organizations

Organizations that qualify under Section 501(c) of tax code are exempt from federal income tax. Many Americans are familiar with tax-exempt entities. These are organizations or businesses that operate exclusively for charitable, religious, educational, scientific, or other specified purposes.

Individual taxpayers and businesses can deduct any contributions to Section 501(c)(3) entities. These tax deductions help reduce your taxable income and overall tax bill. Remember that you must have itemized deductions to take advantage of this.

Contact an Attorney to Learn More About Taxes

The tax benefits of tax exemptions can be tremendous. To ensure you take advantage of all tax exemptions, credits, and deductions, meet with an experienced tax law attorney or CPA. Not only will they help with your tax filing, but they will also help you reduce the amount of your tax payments.