Knowing the difference between an exemption, a credit and a deduction, can be confusing. In this article, we are going to summarize each topic for you.

EXEMPTIONS: A tax exemption can reduce or eliminate your obligation to pay taxes. For tax purposes, there are two categories of exemptions: personal exemptions and dependency exemptions. Each exemption that is claimed reduces income that is subject to tax by the exemption amount.

• Q1: What is a personal exemption and how does it work?
• A1: A personal exemption is the dollar amount that each individual taxpayer can deduct for him or herself or a dependent each year on their tax returns. Prior to the passing of the Tax Cuts and Jobs Act (TCJA), there was a certain amount allowed for each personal exemption. For tax year 2017, that amount was $4,050. For now, the Tax Cuts and Jobs Act has eliminated the personal exemption amount, which became effective as of January 1, 2018.
• Q2: What is a dependency exemption and how does it work?
• A2: For tax purposes, there are two categories of dependents, qualifying child(ren) and qualifying relatives. Each dependency exemption decreases income subject to tax by that exemption amounts. Note that the IRS has strict requirements for determining who qualifies as a dependent. In addition to the Internal Revenue website, there are countless other online sources that you can refer to for more specifics on the requirements.

CREDITS.

• Q1: What is a tax credit and how does it work?
• A1: A tax credit is an amount of money that taxpayers are permitted to subtract from taxes owed. Instead of reducing taxable income, tax credits reduce the actual amount of taxes owed. There are numerous tax credits, which either fall under the categories of a refundable, non-refundable, or partially refundable credit.
• Q2: How does refundable, non-refundable, and partially refundable credits work?
• A2: A refundable credit can reduce your tax liability to below zero, which means that any excess of the credit is issued to you in the form of a refund. A non-refundable credit is subtracted from your income tax liability up to the amount that is owed. If the credit amount exceeds your tax liability, the excess amount is basically lost. The excess amount does not create a refund for you like a refundable credit does. There are some credits that fit into both the refundable and non refundable credit categories. These credits are referred to as partially refundable credits. With this type of credit, only a certain portion of the credit be refunded to you. With a partially refundable credit, it can be subtracted from the amount of taxes owed and to a certain extent, applied to increase the tax refund. As you can see, the partially refundable credit is not as straightforward as the refundable and non-refundable credits. Some examples of refundable credits are as follows: Additional child tax credit,  Earned income credit (EITC), Health coverage tax credit.
  Examples of non-refundable credits: Adoption tax Credit,  Child Tax Credit, Mortgage Interest Tax Credit.
  Note that the above lists include only a few of the credits that fall under the refundable and non refundable credit categories. You can refer to various other online sources for a more complete list of refundable, non-refundable, and partially refundable credits (Or reach out to our office).

DEDUCTIONS.
Even though a tax deduction reduces your taxable income like an exemption does, deductions usually arise from some type of expense. The difference between a tax credit and a deduction is that tax credits provide a dollar for dollar reduction of income tax liability, whereas a tax deduction lowers your taxable income and is equal to the percentage of your marginal tax rate. Some examples of deductions are as follows:
Medical Expense Deduction, Charitable Deductions,Half of self-employment tax for self-employed individuals.

In summary, the difference between an exemption, credit, and deduction is that exemptions and deductions reduce your taxable income and credits reduce your tax liability.