If you haven’t filed your taxes yet, don’t panic — but act fast.
Have read about tax exemptions but aren’t sure what they are? Bankrate explains.
What is a tax exemption?
A tax exemption is the right to exclude all or some income from taxation by federal or states governments. Most taxpayers are entitled to various exemptions to reduce their taxable income, and certain individuals and organizations are completely exempt from paying taxes.
Tax exemptions are related to but distinct from tax deductions. A tax deduction is a portion of taxable income that may be excluded from taxation when certain conditions are satisfied, while a tax exemption constitutes income that is not subject to taxation in the first place. Meanwhile, a tax credit is applied to reduce the amount of tax owed, independent of taxable income.
The government typically exempts organizations from income tax entirely when they serve the public good, such as religious or charitable organizations. The government eliminates the tax burden of certain organizations it helps them further promote public welfare.
In the United States, non-profit organizations are typically exempt from federal taxes. These organizations include charities, churches, schools, and labor unions. Non-profit tax exemptions depend on several factors, such as purpose, activities, and sources of income. State tax laws vary; however, such organizations are generally exempt from state income and property taxes, and sometimes sales tax.
Individual tax exemptions
If an individual is not declared as a dependent on another taxpayer’s return, he or she can claim one personal tax exemption. This is a fixed amount that increases every year. The exemption reduces the taxpayer’s taxable income in the same way a deduction does, but has fewer restrictions. If the taxpayer is married and files a joint tax return, both spouses receive an exemption. The Internal Revenue Service (IRS) allows taxpayers to take additional exemptions for each dependent they claim.
Calculate your mortgage tax deduction with our handy calculator.
Tax exemption example
State and local governments provide tax exemptions to businesses to boost the local economy. A business may be exempted from local property taxes if it moves its operations to a particular geographic area. In Massachusetts, the state government provides a sales tax exemption to many telecommunication companies that provide internet access, cable television, and public broadcasts of television and radio. A lot of states and cities also provide tax holidays in which consumers can buy goods without paying local and state sales taxes.
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