Exemption

An exemption reduces the amount of income that is subject to federal income tax. While several exemption types exist, changes from the Tax Cuts and Jobs Act (TCJA) effectively suspended the personal exemption through 2025 and replaced its effect with larger standard deductions. Other exemptions—dependent exemptions, income exclusions, and special-category exemptions—remain important tools for lowering tax liability.

Key points

• An exemption reduces taxable income and can lower your overall tax bill.
• The personal exemption is suspended through 2025 and largely replaced by higher standard deductions.
• Dependent-related benefits and various income exclusions (e.g., municipal bond interest, qualified HSA or Roth distributions) can still be tax-exempt.
• Employees use Form W-4 to adjust withholding; a taxpayer with no expected federal tax liability can claim exemption from income-tax withholding.

How exemptions work

Before the TCJA, taxpayers could claim a personal exemption for themselves and for qualified dependents, which directly reduced taxable income. The TCJA (2017) temporarily eliminated the personal exemption through tax year 2025 and increased the standard deduction amounts instead. Exemptions and exclusions that remain in effect can still substantially change a taxpayer’s situation by lowering taxable income or eliminating tax on specific kinds of income.

Personal and dependent exemptions

• Personal exemption: suspended through 2025. The higher standard deduction is now the primary basic reduction to taxable income for most taxpayers.
• Dependent exemptions and related benefits: taxpayers can still claim dependents if they meet IRS criteria (relationship, support, residency, etc.). Only one taxpayer may claim a given dependent. The Child Tax Credit was increased by the TCJA to a maximum of $2,000 per qualifying child (subject to income phaseouts and rules).

Other common exemptions and exclusions

• Exemptions from withholding: If you expect no federal income tax liability, you may claim exemption from income-tax withholding on Form W-4. Social Security and Medicare taxes are still withheld.
• Income that is commonly tax-exempt:
• Interest from most municipal (state and local) bonds (federal tax-exempt).
• Gifts that do not exceed the annual exclusion amount ($16,000 per donee in 2022; $17,000 in 2023).
• Distributions from Health Savings Accounts (HSAs) used for qualified medical expenses.
• Qualified distributions from Roth IRAs and Roth 401(k) plans (tax-free if rules are met).
• Special-category exemptions: certain not-for-profit organizations, U.S. citizens working abroad, low-income taxpayers, and other specific groups may qualify for particular exemptions or exclusions.

Form W-4 and withholding

Employees complete Form W-4 to tell employers how much federal income tax to withhold. If an employee properly claims exemption from withholding because they expect no tax liability for the year, the employer will not withhold federal income tax but will still withhold Social Security and Medicare taxes.

What is a qualified dependent?

A qualified dependent generally is someone who relies on the taxpayer for financial support—commonly a child or other close relative who meets IRS tests (relationship, residency, support, and other rules). Only one taxpayer can claim the same dependent on a federal return for a given tax year.

Standard deduction examples

Standard deduction amounts (examples):
* 2022: $12,950 (single), $25,900 (married filing jointly)
* 2023: $13,850 (single), $27,700 (married filing jointly)
These amounts are adjusted periodically for inflation and replace the basic personal exemption for most taxpayers through 2025.

Takeaway

Exemptions and exclusions lower taxable income or exclude certain income from tax entirely. Although the personal exemption is suspended through 2025, dependent-related benefits and numerous income exclusions still affect tax liability. Review Form W-4 for withholding choices and consult IRS rules or a tax professional to determine which exemptions or exclusions apply to your situation.