What is a Tax Exemption?

Adam Hill
Adam Hill
Churches can receive a tax exemption.
Churches can receive a tax exemption.

A tax exemption is a reduction or elimination of the taxes normally imposed on individuals and organizations by state and federal governments. In order to be tax-exempt, an organization must meet certain criteria that are specifically defined by the United States Internal Revenue Code (IRC). Many organizations which receive exemption from taxes under the IRC are charities, churches, and any other organizations which are operated for tax-exempt purposes.

Non-profit organizations are generally tax-exempt.
Non-profit organizations are generally tax-exempt.

A tax exemption is usually provided to an organization which is part of a sector of the economy which the government wants to promote economically. This is certainly the case, for example, with charitable organizations. The government wishes to reduce the tax burden on these types of organizations, based on the premise that doing so will encourage the economic activity of the tax-exempt organization. Tax exemptions can also serve the purpose of reducing the taxes borne by a particular segment of society, in the interest of fairness.

Non-profit organizations are generally tax-exempt on a federal level in the U.S. These may include schools, churches, charities, labor unions, and even amateur sports leagues. For these organizations, their tax exemption will depend on a number of factors, such as their sources of income, their purpose, and their activities. The tax laws at the state level also provide exemptions for many of these same organizations, although the laws vary from place to place. Generally, however, they would be exempt from property taxes and state income taxes, as well as sales tax.

Additionally, individuals can receive a tax exemption for some types of benefits and income. Life insurance benefits, for example, fall under the tax-exempt category, as well as combat pay for military personnel and interest earned from investing in municipal bonds. These types of income, as well as several others, are tax-exempt because of how they are received. For-profit businesses also have a tax exemption available to them in some cases, especially when they are generally seen as providing a valuable service to society or an essential product for the economy. These tax exemptions are often controversial, however, and are criticized by those who feel that this gives the tax-exempt businesses and unfair advantage.

Various other types of tax exemption exist to serve the needs of government and different jurisdictions. For example, some organizations which resell goods, such as telecommunications companies, are often exempt from state sales taxes. At the discretion of local governments, sales which take place on certain days may be exempt from sales tax. This is a common occurrence during holiday periods and in the wake of natural disasters, and is used as a positive incentive for consumers to purchase goods.

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Discussion Comments


Oasis11-I always take advantage of sales like that. I also know that there is an inheritance tax exemption for estates $5 million and under.

This is a recent law because previously there was no estate tax. I also know that investments like municipal bonds are tax exempt because the government wants to encourage people to lend money to state and local governments or municipalities hence the name.

Because of the tax savings many people with higher income invest in these types of bonds because it gives them a comfortable income stream free of taxes.

It is best to invest in general obligation bonds instead of revenue bonds because they are the safest. Also it is a good idea to take a look at each state’s finances before considering the investment.

For example, a Texas municipal bond is much safer than a California municipal bond, because unlike California which is virtually bankrupt, Texas is one of the few states that actually have a budget surplus. The Governor credits this with the incredible low tax rates for the citizens and businesses of Texas.


Nonprofit organizations have to fill out a tax exemption form and receive a tax exemption certificate in order to qualify for sales tax exemption.

Charities, churches and some schools fall under this category. People can also receive sales tax exemptions during the back to school season in August.

In Florida it is usually the second weekend in August, but some stores offer these types of discounts for school purchases throughout the year.

For example, Sunshine Uniforms, the store where I get my kids uniforms from offers a sales tax exempt week for all of its patrons in June. This is to encourage people to purchase the uniforms early and avoid the mad rush in August.

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    • Churches can receive a tax exemption.
      By: Graça Victoria
      Churches can receive a tax exemption.
    • Non-profit organizations are generally tax-exempt.
      By: Monkey Business
      Non-profit organizations are generally tax-exempt.