Tax Exemption

A tax exemption is an exemption from all or certain taxes of a state or nation in which part of the taxes that would normally be collected from an individual or an organization is instead foregone.

Normally a tax exemption is provided to an individual or organization which falls within a class which the government wishes to promote economically, such as charitable organizations. Tax exemptions are usually meant to either reduce the tax burden on a particular segment of society in the interests of fairness or to promote some type of economic activity through reducing the tax burden on those organizations or individuals who are involved in that activity.

Typical tax exemption criteria used include: age of the individual paying tax, public services which the individual has performed (e.g., war veterans), ownership of types of property (homeowners, farmers), geographic location of property, income level of the individual paying the tax, or the value of the property being taxed.

In the United States, the classic property tax exemption provided homeowners is the homestead exemption. There are many others such as exemptions on income tax (exemptions for dependents or people such as children who are financially dependent on the taxpayer).

Tax exemptions have a history as being tools of social and economic change with unintended consequences.

Tax Deduction

A tax deduction or a tax-deductible expense represents an expense incurred by a taxpayer that is subtracted from gross income and results in a lower overall taxable income, no tax exemption.

Many types of income and benefits may also be exempt from income taxes to some limited extent, because of how they were received, such as educational scholarships, gifts, inheritances, combat pay to military personnel, income from local bonds, employee discounts, payments for personal injuries, and life insurance proceeds. U.S. ref: Adjustments to gross income: 26 U.S.C. § 101 et seq.

Example Of Homestead Exemption

The following text describes the basic homestead exemption for the State of Florida.

Generally, initial application for property tax exemption must be made between January 1 and March 1 of the year for which the exemption is sought. Initial application should be made in person at the property appraiser’s office.

Every person who has legal or equitable title to real property in the State of Florida and who resides on the property on January 1 and in good faith makes it his or her permanent home is eligible for a homestead exemption. If title is held by the husband alone, a wife may file for him, with his consent, and vice-versa. If property is held by the entireties, one spouse may file as agent for the other.

If filing for the first time, be prepared to answer these questions:

1. In whose name or names was the title to the dwelling recorded as of January 1?

2. What is the street address of the property?

3. How long have you been a legal resident of the State of Florida? (A Declaration of Domicile or Voter’s Registration will be proof of date before January 1.)

4. Do you have a Florida license plate on your car and a Florida driver’s license?

5. Were you living in the dwelling on January 1?

Further down this same page is a description of the homestead exemption for “Totally and Permanently Disabled Persons” which says:

1. Real estate used and owned as a homestead by a quadriplegic, less any portion used for commercial purposes, is exempt from taxation.

2. Real estate used and owned as a homestead, less any portion used for commercial purposes, by a paraplegic, hemiplegic, or other totally and permanently disabled person, who must use a wheelchair for mobility or who is legally blind, is exempt from taxation.

A person seeking exemption under number 2 above must meet gross income limitations. Gross income includes veterans’ and social security benefits. The gross income of all persons residing in the homestead for the prior year cannot exceed $14,500. However, beginning January 1, 1991, the $14,500 limitation will be adjusted annually. The adjustment will be based on the percentage change in the average cost-of-living index of the immediate year compared with the prior year.

If filing for the first time, a certificate of total and permanent disability from two licensed doctors of this state or from the Veterans’ Administration is required.

Non-Profit Organizations

In the United States, some types of non-profit organizations, such as churches, schools and charities, are exempted from paying income tax. Conditions depend on the type and purpose of entity, defined in 26 U.S.C. § 501(c), sources of income, activities, and other factors. Other types of tax-exempt organizations include: amateur sports leagues, labour unions, farm associations, and groups of veterans or present members of the U.S. armed forces.

Under state laws, many of these same organizations may also apply for exemption from property taxes, sales taxes and state income taxes, although the rules vary from place to place.

Tax Exemption To Businesses

Tax exemptions to specific businesses, especially that are considered part of Big Oil are often controversial and criticized as corporate welfare. However, exemptions from property tax or other local taxes can also be used as a tool for attracting business to areas suffering from economic depression.

Sales Tax

In the United States, organizations which resell goods may be exempt from paying state sales taxes on their wares because the taxes are only applied when the item is sold or brought into a state for use or consumption. Some states also exempt sales of specific types of goods or services, such as fresh produce (e.g., meat, vegetables) or safety equipment. As an incentive to consumers, some jurisdictions may also suspend some sales taxes during holiday periods or during emergencies.

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