Many people dream of becoming entrepreneurs, and often the biggest...
Letting technology do the heavy lifting for certain monotonous tasks...
Growth often hinges on capable leadership at every...
Reaching $10 million in Annual Recurring Revenue (ARR)...
August 19, 2021
Neha De is a writer and editor with more than 13 years of experience. She has worked on a variety of genres and platforms, including books, magazine articles, blog posts and website copy. She is passionate about producing clear and concise content that is engaging and informative. In her spare time, Neha enjoys dancing, running and spending time with her family.
Taxpayers are always looking for ways to reduce their taxable income. And knowing the difference between tax rebates, tax exemptions and tax deductions can be a powerful tool. That said, these terms are often mistakenly used interchangeably by people.
Without further ado, let’s break these terms down:
Federal tax law allows taxpayers to deduct a number of different personal expenses from their taxable income each year. However, according to the U.S. Internal Revenue Code, there are specific types of things that can be expensed and offer tax savings.
For the year 2020, by availing the standard deduction, one can deduct up to $300 per tax return of qualified cash contributions. And for 2021, this amount is up to $600 per tax return for married couples filing joint returns and $300 for other filing statuses.
Before arriving at the final taxable income amount, one needs to calculate the adjusted gross income for personal income tax returns. In order to arrive at AGI, the deductions are typically less restrictive than below the line deductions (explained next) since their limitations have no effect on the AGI.
For instance, the student loan interest deduction allows one to deduct the interest paid on qualified student loans provided the deduction-specific requirements are met. Similarly, the qualified self-employed health insurance payments are fully deductible irrespective of the AGI.
Deductions taken below the line reduce the AGI. Several of these deductions have different limitations that directly correlate with the amount of AGI one reports. Most of these deductions are related to the expenses an individual itemizes on the Schedule A attachment to their personal income tax return. Medical and dental expenses as well as charitable contributions are some common itemized deductions. Note: The deductible medical expenses only include the portion that exceeds 7.5% of the AGI for the year 2020.
Taxpayers who choose to itemize deductions cannot claim the standard deduction either.
A small business owner can avail any business deduction that is available to all other types of businesses on the Schedule C. Examples of such deductions are staff salaries, office rent, advertising and marketing expenses, and other reasonable expenses that solely relate to the company.
Most taxpayers are entitled to some type of tax exemption on their tax returns that reduce their tax outgo. State and federal governments often exempt companies from paying income tax entirely when they serve the public, such as with religious organizations or charities.
Before 2018, if an individual is not claimed as a dependent on another taxpayer’s return, then they can claim one personal tax exemption. This is a fixed amount that usually goes up every year. The exemption lowers their taxable income, but with fewer restrictions than a deduction.
For married couples filing a joint return, both spouses each get an exemption.
Before 2018, the IRS allowed individuals to take additional exemptions for each dependent they claimed. The source of these exemptions are usually children who live with them for more than six months, are under the age of 19 (or under 24 if a full-time student) and who do not contribute more than half of their own financial support during the tax year. Other dependents may be relatives who live with the taxpayers or parents even if they don’t.
For a company to receive tax-exempt status, it must satisfy all IRS requirements. Usually, these are nonprofit organizations that provide valuable services to the community.
Once a firm receives tax-exempt status, it does not have to pay federal income tax, but it must maintain up-to-date and accurate records to keep its status. Donations made to these organizations may entitle individuals to claim a charitable contribution deduction if itemized.
State, county and municipal governments also offer tax exemptions to companies in order to stimulate the local economy. For instance, an organization may be exempt from paying local property taxes if it moves its operations to a particular geographic area. Or, cities and states may offer sales tax holidays where customers are able to purchase goods without paying state or local sales taxes.
Federal, state and local authorities often issue tax rebates to encourage taxpayers to stimulate a flagging economy quickly or to make certain types of purchases by getting cash into users’ hands. The eligibility requirements for tax rebates vary widely, but broadly, taxpayers do not have to wait until they file next year’s tax return to receive payment. In many cases, the tax rebate check is not directly related to deductions and credits one claims on a return.
Tax rebate measures are usually more immediate than tax refunds because governments can enact them at any time during the year. One example is the Recovery Rebate Credit of 2008, which the federal government passed to help jump-start the U.S. economy in the middle of a severe economic slowdown. The government anticipated that this would encourage taxpayers to immediately spend their checks, thereby stimulating the economy.
Some state and local governments also provide incentives in the form of rebates for the purchase of alternative energy systems such as solar. A large part of the funding for such programs comes from the federal government, although the refunds are administered by individual states and municipalities.
Protecting and preserving the environment is a major concern in many areas. In order to encourage the purchase of hybrid cars that reduce gasoline consumption, some state and local governments also offer a number of rebates.
Our team is made up of seasoned professionals who bring years of industry experience to the table. You gain a trusted advisor who understands your business inside out.
Say goodbye to the hassles of hiring, training and managing in-house finance teams. You will never have to worry about unexpected leave of absence or retraining new employees.
Whether you’re a small business or a global powerhouse, our solutions scale with your needs. We eliminate inefficiencies, reduce costs and help you focus on growing your business.
Growth often hinges on capable leadership at every level. Yet many medium-sized businesses focus on filling immediate management vacancies rather...
Reaching $10 million in Annual Recurring Revenue (ARR) is a major milestone, but scaling further brings new operational hurdles. From...
April 30, 2025– Escalon Services, a leading provider of back-office solutions for startups and SMBs, proudly announces that it has...
Moving from 25 employees to 100 is a tipping point for many businesses. What worked with a lean, close-knit team...
Compensation isn’t just about paying people to show up and do work; it’s a strategic tool that can attract top...
Accurate accounting is the bedrock of any successful business operation. Yet, medium-sized businesses—those that have grown beyond the small-business stage...
Distinguishing between independent contractors (1099) and employees (W-2) is a pivotal compliance matter for U.S. businesses. Misclassification can result in...
Spring symbolizes renewal, making it an apt metaphor for startups aiming to secure fresh capital to fuel their next growth...
Payroll is more than just issuing paychecks—it’s a complex, high-stakes process that can significantly impact employee satisfaction, legal compliance, and...