What is an exemption?
At a glance
- A tax exemption is a deduction that reduces taxable income, previously available as personal and dependent exemptions before being eliminated by tax reform.
- Although personal and dependent exemptions are no longer allowed, the standard deduction increased to offset the change.
- Non-profit organizations and certain businesses may qualify for federal and state tax exemptions based on their operations and contributions to the community.
The term “exemptions” can apply to many aspects of taxes. There are employee withholding, nonprofit, and state exemptions, to name a few applications of this term. In this post, we’ll outline what an exemption is and how to apply the definition to your specific tax situation.
Read on to better understand what a tax exemption is, what is tax exempt, and other state tax exemptions. For a quick overview, review the comparison of exemption related terms at the end of this article.
What is a tax exemption?
A tax exemption is a specific type of tax deduction that lowers your taxes. For federal taxes, a tax exemption was a feature of the tax code available prior to tax year 2018.
The Tax Cuts and Jobs Act (TCJA) suspended tax exemptions temporarily through 2025, and the One Big Beautiful Bill Act (OBBBA) removed them permanently.
Tax exemptions no longer available
Before the TCJA, the IRS offered two tax exemptions:
1 – Personal exemptions: The amount a taxpayer is entitled to claim as a tax deduction against personal income. Personal exemptions were an input to calculate the amount owed in federal income taxes. All taxpayers could claim a personal exemption.
For married taxpayers filing separate returns, an exemption could only be claimed for a spouse if that spouse:
- Had no gross income
- Wasn’t filing a tax return
- Wasn’t the dependent of another taxpayer
2 – Dependent exemptions: Taxpayers could also claim a tax exemption for dependents pre-tax reform. A dependent qualified as either a child or a relative who met a series of tests. (See IRS Publication 501, Exemptions, Standard Deduction and Filing Information for more information.)
Tax exemption vs. standard deduction trade-off post tax reform
While personal and dependent tax exemptions are permanently gone, the higher standard deduction amount was also made permanent. This trade-off allows taxpayers to continue to have a large part of their income not subject to tax.
These are the current standard deduction rates:
- For couples filing jointly, the amount for 2024 is $29,200.*
- For an individual taxpayer, the amount for 2024 is $14,600.*
*Amounts are subject to inflation.
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Other tax exemption definitions
The term “exemptions” (or being exempt) has other uses in the tax code. Take note: The following exemptions are not the same as the federal tax exemptions mentioned above.
1 – Employee who are exempt from withholding
All employers of W-2 employees withhold income tax from their employees’ pay. This payment is sent through their paychecks to the IRS. If an employee has zero tax liability, they can claim exemption from withholding on their Form W-4. This means their employer doesn’t take out any federal income tax withholdings from their paycheck and would withhold only Social Security and Medicare contributions.
2 – State tax exemptions
City, county, and state governments offer tax exemptions to businesses to fuel the local economy. There are multiple state tax exemptions for paying property taxes, for example, if the business meets certain conditions. Some states also have lowered tax rates for certain types of industries. To find if your state tax exempt laws, visit your area’s department of revenue/taxation’s website. You can also view more information about state taxes.
Note: Some states still provide personal and dependent exemptions.
3- Tax exemptions for non-profit organizations
To make matters more complicated, many non-profit organizations are exempt from some taxes.
Generally, any organization that doesn’t operate for profit and offers valuable community services can qualify for non-profit tax exemptions. In fact, they are exempt from most federal income tax and some state tax (property or sales). Additionally, some charitable contributors can take tax deductions for donations to qualifying non-profit organizations.
Tax designations for non-profits are 501(c)(1-28). The most common is 501(c)(3).
Qualified non-profits have a tax exemption number. You can apply for one or search for one on IRS.gov. In the search tab, you can look up organizations by name, state, or zip code.
What is tax exempt?
Being “tax exempt” means that certain income, revenue, or specific organizations are free from having to pay certain taxes. Generally, non-profit entities can be tax exempt. This includes charities, religious organizations, and educational organizations. Individuals are not tax exempt in the way that these organizations are.
Comparing terms: Tax exemption vs. exempt from withholding vs. being tax exempt
It may help to see these terms side by side for more clarity.
| Term | Definition | Who It Applies To | Key Implication |
| Federal Tax Exemption | An outdated provision that excludes certain income from taxation. | Individuals | Reduces or eliminates tax liability for specific income or entities. |
| Exempt from Withholding | A status claimed on Form W-4 to avoid federal income tax being withheld from paychecks. | Employees who expect to owe no federal income tax. | No federal income tax is withheld from wages, but other taxes (like Social Security) may still apply. |
| Being Tax Exempt | A general term often used to describe entities (like nonprofits) that are not subject to certain taxes. | Typically organizations (e.g., 501(c)(3) nonprofits). | Organization doesn’t pay federal income tax on qualifying income. May still owe other taxes |
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Frankly, there are a lot of rules when it comes to taxes, so let H&R Block guide you. Whether you choose to file with a tax pro or file with H&R Block Online, you can rest assured that we’ll get you the biggest refund possible.
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