What Is IRS Publication 501?
IRS Publication 501 is published by the Internal Revenue Service (IRS) that covers tax exemptions and the amount of the standard deduction. This informational document also explains who must file a tax return and what filing status should be used, as well as information on dependents and how to account for them when filing a return.
IRS Publication 501 can be found on the IRS website.
Key Takeaways
- IRS Publication 501 outlines tax information regarding how to deal with dependents, the standard deduction, tax exemptions, and filing status.
- Dependents, deductions, and exemptions will all impact the decision whether or not to itemize deductions on your tax return.
- Filing status also matters, and while most married taxpayers will file jointly, there may be reasons to file separately or as head of household.
Understanding IRS Publication 501
IRS Publication 501 is entitled: Dependents, Standard Deduction, and Filing Information, and is made available to taxpayers on the IRS website. Below, these topics are briefly outlined:
Dependents
Claiming a dependent on your tax return makes all the difference when it comes to taxes. Adding a dependent on your tax return increases the exemption amount you can claim, which in turn reduces your taxable income and your tax liability. Dependents can also be used to gain tax benefits like the child and dependent care credit and head of household filing status. Before claiming someone as a dependent on your tax return, you have to make sure that the person meets all the Internal Revenue Service (IRS) requirements for a dependent.
Standard Deduction
The IRS standard deduction is the portion of income that is not subject to tax that can be used to reduce your tax bill. You can take the standard deduction only if you do not itemize your deductions using Schedule A of Form 1040 to calculate taxable income. The amount of your standard deduction is based on your filing status, age, and whether you are disabled or claimed as a dependent on someone else’s tax return.
Tax Exemptions
Not to be confused with a tax deductiontax-exempt frees the taxpayer of any tax obligation to submit taxes on the tax-free transaction or income. Whereas, the use of a tax deduction is to reduce the tax obligation by lowering gross income.
One common type of tax-exempt income is interest earned on municipal bondswhich are bonds issued by states and cities to raise funds for general operations or a specific project. When a taxpayer makes interest income on municipal bonds issued in their state of residence, the profit is exempt from both federal and state taxes.
Filing Status
Choosing the correct filing status is an important step in the tax preparation process. The filing status determines whether a tax return should be filed, the rate at which income should be taxed and what standard deduction is permitted. Taxpayers with little or no gross income may not have to file a tax return at all.
For federal income tax purposes, a taxpayer falls into one of five categories: single, married filing jointlymarried filing separately, head of household, and qualifying widow(er) with dependent children.