Tax Exempt: What It Is and What It Means
What does it mean to be tax exempt? The government does not require tax on certain transactions and income types if they are tax exempt.
As an individual or business, you may report tax-exempt items on your tax return but only as a record, since you don’t have to pay taxes on them. In contrast to tax deductions, which reduce gross taxable income, tax-exempt items are left out of all tax calculations.
There’s another use of the term: An entire organization may also be tax-exempt, which means that a specified amount of the gifts and income they receive cannot be taxed.
How to Get a Tax Exemption
If you are not a dependent on someone else’s tax return, you can be granted a personal tax exemption on your own return. This is a set amount that lowers your taxable income.
Even though this sounds similar to a tax deduction, it is distinct and less restricted. You may also get an exemption based on each of your dependents.
Tax-exempt organizations fall under 501(c)(3) of the IRS tax code. Such an organization is exempted from paying income tax on donations or earnings. Taxpayers who donate to tax-exempt organizations may also lower their taxable income through their donation.
Tax-exempt businesses may be involved in:
- Charitable publishing
- Public safety testing
- Amateur sports
Local or state laws may also grant tax exemptions to businesses that move into their region in the form of property or sales tax exemptions.
Tax Help MD Can Help You Prepare and File Your Taxes Correctly
Local, state, and federal tax laws are complex. There are many correct and incorrect ways to claim deductions and tax exemptions.
If you file your taxes with professional assistance, you can ensure you get the most benefit out of these laws. Contact us today to schedule a free 15-minute appointment. Trust The Tax Doctor to file your taxes right or to help you resolve a tax debt.