While filing our taxes might involve a detailed analysis of what we spent throughout the year to build our list of deductions, the IRS also offers some incentives that reduce the amount of taxable income the average taxpayer has. These incentives are also referred to as tax exemptions, which reduce your taxable income just like a deduction, but with fewer restrictions. Within the realm of tax exemptions, there are several different types available. To determine which exemptions you qualify for, consult with your local tax professional, such as AccuraTax LLC in Fort Collins, CO.
Below we will discuss just a few of these types of tax exemptions and some notes of caution. Here are just a few of the exemptions available.
Personal Exemptions – If you are not claimed as a dependent on another taxpayer’s return, then you may claim one personal tax exemption. Married individuals filing jointly may claim two personal exemptions.
Dependent Exemptions – These additional exemptions can be taken for each of the dependents you claim. The most common sources of these exemptions are your children under the age of 19 or under the age of 24 if the child is a full-time student. These dependents must also not provide more than half their support, or they will not qualify as a dependent. Other relatives may qualify to be dependents, but there are specific rules that must be met. Consult with your tax preparer or accountant to determine if any of your additional family members qualify as dependents.
Tax Exempt Organizations
The IRS has a list of requirements for an organization to receive a tax-exempt status. The organizations that do qualify are typically non-for-profits and often provide charitable services to the community as a whole. While the organization is not required to pay federal income tax, they do need to keep records that indicate they are staying within the guidelines to maintain their status. Donations made to these types of organizations usually means that the taxpayer can take a charitable contribution deduction on their own taxes, but only if they are itemizing.
State and Local Exemptions
There are also exemptions specific to state, county and other local governments. These exemptions are typically provided to various businesses with the idea that drawing business into their area will create economic growth. For example, a new business might be exempt from paying property taxes for a designated period in exchange for moving to the area. There are also states that have sales tax holidays or choose not to charge sales taxes at all on general purchases. Most of these efforts are economically based, but for the average taxpayer, they can also provide a discount if one can take advantage of these sales tax holidays.
As we have seen, there are a variety of exemptions available to both the individual taxpayer and the corporate taxpayer. All of these exemptions provide a reduction in taxable income, but also allow these taxpayers to stimulate the economy. For example, a business that does not pay property taxes but hires locally will be paying payroll taxes. In addition, their employees will be paying property taxes, sales tax and a host of other taxes throughout their daily lives. Thus, the tax exemption is often made up in other ways by the state or local agency due to the increase of economic activity.
For the average taxpayer, the most important exemptions are the personal and dependents. As we have seen, the dependent exemption can include various members of your household, including your parents who may not live with you, but to whom you provide substantial support. Again, the IRS has very specific guidelines that must be followed in this regard. There are also several credits that can also be used in regards to some of these dependents that can also reduce your tax liability.
Other tax exemptions might be granted to individuals based on their status. Some of these common exemptions include veterans and clergymen. Yet this can also be complex, as some of these exemptions are based on income. To determine if you qualify for an exemption, it is important to consult with a tax professional or your accountant.
There are also exemptions for income itself, based on where it was earned or if there was a loss. As a result, you need to be clear about the jurisdiction the income was earned in to be counted as exempt.
Call or click on the link below to contact a professional at AccuraTax LLC in Fort Collins, CO, who can assist you in determining what exemptions you qualify for.
AccuraTax LLC