UK Accounting Glossary
Tax-exempt is a status or condition in which an entity is free from the legal obligation to pay taxes to a governing body. Certain types of investments are tax exempt. For example, capital gains, dividends, or other income from assets in a Roth IRA are tax exempt, provided they are held for at least five years and the account holder withdraws them after reaching age 59 1/2. Many pension plans are set up to be tax-exempt. Interest on municipal bonds is tax-exempt if the bondholder lives in the state that issued the bonds. Interest on out-of-state bonds may or may not be tax-exempt, depending on whether a state chooses to tax them. Organizations such as educational institutions, religions, registered charities, and non-profit groups can become tax-exempt if they meet the criteria for tax exemption set by local, state, or federal tax authorities. For instance, in section 501(c)(3) of the U.S. tax code, the IRS requires organizations seeking tax-exempt status to provide detailed disclosure about their finances, activities, and purpose or mission.
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This glossary post was last updated: 5th February 2020.