Tax exemption is the monetary exemption of persons, property, income, or transactions from taxes that would otherwise be levied on them. Tax-exempt status can provide complete relief from taxes, reduced rates, or tax on only a portion of items. Examples include exemption of charitable organizations from property taxes and income taxes, veterans, and certain cross-border or multi-jurisdictional scenarios. Tax exemption also refers to removal from taxation of a particular item rather than a deduction. International duty free shopping may be termed "tax-free shopping". In tax-free shopping, the goods are permanently taken outside the jurisdiction, thus paying taxes is not necessary. Tax-free shopping is also found in ships, airplanes and other vessels traveling between countries (or tax areas). Tax-free shopping is usually available in dedicated duty-free shops. However, current European Union rules prohibit most intra-EU tax-free trade, with the exception of certain special territories outside the tax area.
Some jurisdictions allow for a specific monetary reduction of the tax base, which may be referred to as an exemption. For example, the U.S. Federal and many state tax systems allow a deduction of a specified dollar amount for each of several categories of "personal exemptions". The exclusions may be inherent in definitions or restrictions outside the tax law itself.
There are several different approaches used in granting exemption to organizations. Some jurisdictions grant an overall exemption from taxation to organizations meeting certain definitions. The United Kingdom, for example, provides an exemption from rates (property taxes), and income taxes for entities governed by the Charities Law. Some jurisdictions may levy only a single type of tax,exemption from only a particular tax. Some jurisdictions provide for exemption only from certain taxes. The United States exempts certain organizations from Federal income taxes, but not from various excise or most employment taxes.
Many tax systems provide complete exemption from tax for recognized charitable organizations. The U.S. system exempts from Federal and many state income taxes the income of organizations that have qualified for such exemption. Note that the U.S. system does not distinguish between various kinds of tax exempt entities (such as educational versus charitable) for purposes of granting exemption, but does make such distinctions with respect to allowing a tax deduction for contributions. In November 2017, the GOP released a tax bill that would allow churches to keep their tax exemptions even if they endorse political candidates. The UK generally exempts public charities from business rates, corporation tax, income tax, and certain other taxes.
Most systems exempt internal governmental units from all tax. For multi-tier jurisdictions, this exemption generally extends to lower tier units and across units. In addition, many systems also provide tax exemption for personal pension schemes.
Some jurisdictions provide separate total or partial tax exemptions for educational institutions. These exemptions may be limited to certain functions or income.
Some jurisdictions provide tax exemption for other particular types of organizations not meeting any of the above categories.
Some jurisdictions allow tax exemption for organizations exempt from tax in certain other jurisdictions. For example, most U.S. states allow tax exemption for organizations recognized for Federal tax purposes as tax exempt.
See also Sales taxes in the United States, tax-free shopping, tax holiday.
Certain classes of persons may be granted a full or partial tax exemption within a system. The exemption granted may depend on multiple criteria, including criteria otherwise unrelated to the particular tax. For example, a property tax exemption may be provided to certain classes of veterans earning less than a particular income level. Most income tax systems exclude certain classes of income from the taxable income base. Such exclusions may be referred to as exclusions or exemptions. Systems vary highly. Among the more commonly excluded items are:
Income earned outside the taxing jurisdiction. Interest income earned from subsidiary jurisdictions. Some tax systems specifically exclude from income items that the system is trying to encourage. These exemptions may be limited to specific industries. Certain types of property are commonly granted exemption from property or transaction (such as sales or value added) taxes. These exemptions vary highly from jurisdiction to jurisdiction, and definitions of what property qualifies for exemption can be voluminous. Property used by a tax exempt or other parties for a charitable or other not for profit purpose Exemption from tax often requires that certain conditions be met.
Many countries that impose tax have subdivisions or subsidiary jurisdictions that also impose tax. The top tier system may impose restrictions on both the ability of the lower tier system to levy tax as well as how certain aspects of such lower tier system work, including the granting of tax exemptions. The restrictions may be imposed directly on the lower jurisdiction's power to levy tax or indirectly by regulating tax effects of the exemption at the upper tier.
Jurisdictions may enter into agreements with other jurisdictions that provide for reciprocal tax exemption. Such provisions are common in an income tax treaty. These reciprocal tax exemptions typically call for each contracting jurisdiction to exempt certain income of a resident of the other contracting jurisdiction. Multi-jurisdictional agreements for tax exemption also exist.
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