The amounts for exemptions and deductions usually change from year to year. Each type of tax savings has its own rules for who may or may not take the exemption or deduction. Exemptions and deductions reduce taxable income and take effect before Line 43, which is your taxable income. Tax credits are figured after Line 44, which is the amount of tax you pay on the taxable income. Credits reduce your tax bill dollar for dollar while deductions and exemptions reduce your taxes based on your tax bracket. Thus, if you are in the 25 percent tax bracket, each $1,000 in exemptions and deductions will reduce your payable tax by $250.

Definitions

While tax exemptions and tax deductions both lower your taxable income, they do it in different ways.

Tax Exemptions

Tax exemptions are related to your filing status and are based on the number of dependents you are allowed to claim. For the 2017 tax year – you’ll file in 2018 – the personal exemption is $4,050. This did not increase from the 2016 tax year. This exemption starts to phase out at $261,500 for individuals and $313,800 for married couples who file a joint return. The exemption decreases by a certain percentage based on the amount of income over the start of the phase-out. When taxable income reaches $384,000 for an individual or $436,300 for a married couple filing jointly, the personal deduction is completely phased out.

The Alternative Minimum Tax is an alternate way of figuring taxes. It was originally implemented to keep wealthy people from claiming so many deductions so as to owe no tax. However, the AMT was not updated for inflation. In recent years, many middle-class taxpayers were caught up in paying the AMT. Congress finally passed a patch for this issue so that the AMT is now automatically adjusted for inflation. Thus, it does not “catch” as many middle-income people and their taxes are now lower. For 2017, an individual must make $54,300 to be subject to the AMT.

Another exemption is the kiddie tax. If a child under the age of 19 or a college student under the age of 24 brings in income, some of that income is not taxed. For 2017, the threshold for the kiddie tax is $1,050. Any unearned income over $2,100 is taxed at the same rate as the parents.

Tax Deductions

Tax deductions are related to the expenses you paid in the tax year. Like exemptions, you must qualify to take the deduction.

Standard Deduction

You may elect to take a standard deduction or you may itemize your deductions. If you elect to take the standard deduction for 2017, it is $6,350 for individuals, $12,700 for married couples filing a joint return and $9,350 for someone filing as head of household.

In addition, the aged and blind are entitled to take an additional deduction of $1,250. If the individual is not married and not a surviving spouse, the additional deduction is $1,550.

Itemized Deductions

You may also itemize your deductions if the amount is higher than the standard deduction. However, Pease limitations apply to itemizing deductions. The threshold for 2017 is:

$261,500 for individuals
$313,800 for those married and filing jointly and for a surviving spouse
$287,650 for someone filing as head of household
$156,900 for married couples filing separately

The Pease limitation reduces your deductions by 3 percent of your adjusted gross income over the threshold or by 80 percent of the amount of the itemized deductions, whichever is less. The Pease limitations apply to home mortgage deductions, charitable deductions, some miscellaneous itemized deductions and state and local tax deductions.

Investment expenses, medical expenses, gambling losses and some theft and casualty losses are not subject to the Pease limitation threshold. However, this year, the medical expense floor is 10 percent of your adjusted gross income. Last year, those over 65 years of age were able to take a medical expense deduction if their medical expenses were at least 7.5 percent of their adjusted gross income. That has been phased out, so now everyone’s floor is 10 percent.