Exemption Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Exemption, written in plain English, along with examples of how it is used.

What is Exemption?

n. 1) Credit given for each dependent, disability, or age over 65 which result in a lower tax level. Not to be confused with deductions that reduce gross income when taxes are paid. 2) The right to be excluded from taxation if one is in a low-income bracket, not being subject to the military draft if employed in an essential industry, having several children, or being a college student.

History and Meaning of Exemption

The term "exemption" has a long history in tax law. Originally, it referred to the practice of granting individuals or organizations immunity from taxes for religious, charitable, or other purposes deemed to be in the public interest. Over time, the concept of exemption has expanded to include a variety of different categories, such as tax credits for dependents, medical expenses, and education expenses.

Today, exemptions are an important tool for reducing the amount of taxes owed by individuals and businesses. They are typically granted for specific reasons and can be structured in different ways depending on the jurisdiction and type of tax.

Examples of Exemption

  1. An individual who has several children can claim exemptions for each child, which will reduce their taxable income and lower their overall tax bill.

  2. A nonprofit organization that is recognized as tax-exempt by the IRS is exempt from paying federal income taxes on its earnings.

  3. A state may offer exemptions for certain types of goods or services, such as food or prescription drugs, which can be purchased without sales tax.

Legal Terms Similar to Exemption

  1. Deduction - A reduction in taxable income that is allowed for certain expenses, such as mortgage interest or charitable donations.

  2. Tax credit - A dollar-for-dollar reduction in the amount of taxes owed, typically granted for specific expenses or activities.

  3. Exclusion - Exclusion refers to income or property that is not subject to taxation. This can include things like gifts, inheritances, or some types of insurance benefits.