What does Exemption mean?
An exemption is a deduction that reduces the amount of a taxpayer's income that is subject to income tax.
There are two primary types of exemptions. The first is a personal exemption, which is for the taxpayer and the taxpayer's spouse. The second is a dependent exemption, which is an exemption for each qualifying child, family member, or other person for the taxpayers.
The Internal Revenue Service defines the amount allowed for exemptions each tax year. The amount is indexed for inflation. The amount of each exemption is the same whether it is a personal exemption or an exemption for a dependent. For the 2012 tax year, each exemption was worth $3,800. For the 2013 tax year, each exemption will rise to $3,900.
A given individual may serve as an exemption on only one tax return each tax year. For example, if a taxpayer and the taxpayer's spouse have one dependent child and file a joint tax return for the 2013 tax year, the taxpayers will have three exemptions worth $11,100, one each for the taxpayer, the taxpayer's spouse, and the child.
If the taxpayer and the taxpayer's spouse file separate tax returns, the two must determine which of them will claim the child as an exemption.