Final answer:
An exemption is the amount you can subtract from your income for each dependent before calculating your taxes, which ultimately lowers your taxable income. This is part of the process in preparing your tax return and can be influenced by various deductions, exemptions, and credits like the earned income tax credit.
Step-by-step explanation:
A specified amount that you can subtract from your income for each person you support before calculating your taxes is known as an exemption. When you're preparing your tax return, your taxable income is calculated by subtracting deductions and exemptions from your adjusted gross income. For example, for a single person in 2010, the standard deduction and the exemption totaled $9,350.
If you have dependents, such as children, you can claim an exemption for each dependent, further reducing your taxable income. The process of calculating taxable income can become more complex with additional forms of income or when itemizing deductions, such as for mortgage interest or property taxes. Moreover, tax credits like the earned income tax credit can also affect the final tax liability, especially for low to moderate-income families.