Exemption

An exemption is a legally-allowed reduction of the reported amount of taxable income. An example of an exemption is a deduction from taxable income of a set amount for each dependent claimed by a taxpayer. Depending on the situation, exemptions are reduced for those taxpayers reporting high levels of income, thereby targeting exemptions at lower-income households. A variation on the concept is a claim to be exempt from withholding; when claimed, the employer does not withhold income taxes from an employee's paycheck. Instead, the employee is directly responsible for any income taxes owed to the government.