What’s the Difference Between Tax Exemptions and Tax Deductions?
Two years ago, our tax preparer suggested we take advantage of tax breaks like IRAs and home ownership. We then looked at our options and started working on our IRAs. Buying a house just for a tax break wasn’t what we wanted, so we paid down our debt and saved some money on the side for our upcoming town house purchase. We did, however, realize that we needed to be more informed when it comes to taxes, and to (legally) maximize any tax breaks we can get. If you’ve read much about taxes, you’ll no doubt have seen the terms “exemption” and “deduction.” Today, I’m going to talk a bit about what these terms mean, and why they matter. Exemptions vs. deductions First off, exemptions and reductions both reduce your taxable income, which is a good thing. Exemptions are specified amounts by which you reduce your taxable income — just for being you! For 2009, federal income tax exemptions (either personal or for dependents) are $3,650 each. There are adjusted gross income (AGI) limits beyond whi
