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What Is the Difference among an "Exemption," a "Credit," and an "Exclusion?"

The following is an insert to "Highlights of the New Tax Law" Article.

An exemption is an amount allowed as a deduction from what is taxed. In the estate tax context, the "exemption equivalent" is the maximum value of assets that can be transferred to another party without incurring any gift or estate tax because of the application of what we used to call the "unified credit" (The new tax law uses the term "applicable credit amount" instead, with the "amount" referring to the value of assets subject to the exemption, rather than to the tax credit.)

Credits reduce the tax liability as computed, as opposed to exemptions or deductions which reduce the amount of assets (or income) being taxed. In the estate tax context, what was (until this new law) the $600,000 exemption (i.e., value of estate assets not subject to estate taxes) was equal to $192,800-worth of estate taxes. The "credit" against the amount of tax to be paid was thus $192,800, which was equal to $600,000-worth of assets.

An exclusion is a dollar amount not subject to taxation. For gift tax purposes, it is the amount which a donor (the person who makes the gift) may transfer by gift each year without tax consequences (i.e., the "annual exclusion"). In the income tax context, it is an item of income that is excluded from gross income and therefore not taxed; for example, a gift or an inheritance.

Source: Black's Law Dictionary, Sixth Edition.

The contents of this publication are for information purposes only and are not meant nor should be construed to be legal advice. Note, also, the date of the document. Laws are constantly changing, and are subject to differing interpretations. We, therefore, urge you to do additional research or to contact your own legal or tax counsel before acting on the information contained here.

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