Tax exemption

Short description: Monetary exemption from taxes that would otherwise be levied

"Tax free" redirects here. For the rock band, see Tax Free.

Taxation

An aspect of fiscal policy

Policies

* Government revenue
* Property tax equalization
* Tax revenue
* Non-tax revenue
* Tax law
* Tax bracket
* Tax threshold
* Exemption
* Credit
* Deduction
* Tax shift
* Tax cut
* Tax holiday
* Tax advantage
* Tax incentive
* Tax reform
* Tax harmonization
* Tax competition
* Double taxation
* Representation
* Unions
* Medical savings account
* Tax, tariff and trade

Economics

|  General Theory

* Price effect
* Excess burden
* Tax incidence
* Laffer curve
* Optimal tax
* Theory
* Optimal capital income taxation

Distribution of Tax

* Tax rate
* Flat
* Progressive
* Regressive
* Proportional

Collection

* Revenue service
* Revenue stamp
* Tax assessment
* Taxable income
* Tax lien
* Tax refund
* Tax shield
* Tax residence
* Tax preparation
* Tax investigation
* Tax shelter
* Private tax collection
* Tax farming

Noncompliance

|  General

* Tax avoidance
* Tax evasion
* Tax resistance
* Tax shelter
* Smuggling
* Black market
* Unreported employment

Corporate

* Tax inversion
* Transfer mispricing
* Base erosion and profit shifting (BEPS)
* Double Irish
* Dutch Sandwich
* Single Malt
* CAIA/Green Jersey

Locations

* Tax havens
* Corporate tax havens
* Offshore financial centres (OFCs)
* Offshore magic circle
* Conduit and Sink OFCs
* Financial centres
* Financial Secrecy Index

Major examples

* Apple €13 billion fine
* Ireland as a tax haven
* Leprechaun economics
* Liechtenstein tax affair
* Luxembourg Leaks
* Offshore Leaks
* Paradise Papers
* Panama Papers
* Swiss Leaks
* United States as a tax haven
* Panama as a tax haven

Types

* Direct
* Indirect
* Per unit
* Ad valorem
* In rem
* Capital gains
* Carbon
* Consumption
* Dividend
* Ecotax
* Excise
* Fuel
* Georgist
* Gift
* Gross receipts
* Income
* Inheritance (estate)
* Land value
* Payroll
* Pigovian
* Property
* Sales
* Sin
* Single
* Stamp
* Steering
* Turnover
* Value-added (VAT)
* Corporate profit
* Excess profits
* Windfall profits
* Negative (income)
* Wealth

International

* Financial transaction tax
* Currency transaction tax
* European Union Common Consolidated Corporate Tax Base (CCCTB)
* Tobin tax
* Spahn tax
* Tax equalization
* Tax treaty
* Permanent establishment
* Transfer pricing
* European Union FTT
* Foreign revenue rule

Trade

* Custom
* Duty
* Tariff
* Import
* Export
* Tariff war
* Free trade
* Free trade zone
* Trade agreement
* ATA Carnet

Research

|  Academic

* Mihir A. Desai
* Dhammika Dharmapala
* James R. Hines Jr.
* Ronen Palan
* Joel Slemrod
* Gabriel Zucman

Advocacy groups

* Tax Justice Network (TJN)
* Institute on Taxation and Economic Policy (ITEP)
* Oxfam (UK)
* Tax Foundation (US)
* Tax Policy Center (US)

Religious

* Church tax
* Eight per thousand
* Teind
* Tithe
* Fiscus Judaicus
* Leibzoll
* Temple tax
* Tolerance tax
* Jizya
* Kharaj
* Khums
* Nisab
* Zakat

By country

|  All Countries

* List of countries by tax rates
* Tax revenues as % of GDP
* Tax rates in Europe

Individual Countries

* Albania
* Algeria
* Argentina
* Australia
* Azerbaijan
* Bangladesh
* Bhutan
* Brazil
* Bulgaria
* BVI
* Canada
* China
* Colombia
* Croatia
* Denmark
* Finland
* France
* Germany
* Greece
* Hong Kong
* Iceland
* India
* Indonesia
* Iran
* Ireland
* Israel
* Italy
* Japan
* Kazakhstan
* Lithuania
* Malta
* Morocco
* Namibia
* Netherlands
* New Zealand
* Norway
* Pakistan
* Palestine
* Peru
* Philippines
* Poland
* Portugal
* Russia
* Singapore
* South Africa
* Sri Lanka
* Sweden
* Switzerland
* Taiwan
* Tanzania
* United Kingdom
* United States
* Uruguay

* v
* t
* e

Tax exemption is the reduction or removal of a liability to make a compulsory payment that would otherwise be imposed by a ruling power upon persons, property, income, or transactions. Tax-exempt status may 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.

Similar terminology is used on different types of tax expenditures, such as tax exclusion and tax deduction.[1] A tax exemption is an income stream on which no tax is levied, such as interest income from state and local bonds, which is often exempt from federal income tax. Additionally, certain qualifying non-profit organizations are exempt from federal income tax.[2] A tax exclusion refers to a dollar amount (or proportion of taxable income) that can be legally excluded from the taxable base income prior to assessment of tax, such as the $250,000/$500,000 home sale tax exclusion in the U.S.[3] A tax deduction is a documented amount subtracted from the adjusted gross income to compute taxable income, such as charitable contributions.[4][5]

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. In such a scenario, a sum equivalent to the tax is paid, but reimbursed on exit. More common in Europe, tax-free is less frequent in the United States, with the exception of Louisiana. However, current European Union rules prohibit most intra-EU tax-free trade, with the exception of certain special territories outside the tax area.

## Contents

* 1 Specific monetary exemptions
* 2 Exempt organizations
* 2.1 Approaches for exemption
* 2.2 Charitable, nonprofit and religious organizations
* 2.3 Governmental entities
* 2.4 Pension schemes
* 2.5 Educational institutions
* 2.6 Sales tax
* 3 Exempt individuals
* 4 Exempt income
* 5 Exempt property
* 6 Multi-tier jurisdictions
* 7 Cross-border agreements
* 8 Diplomatic tax exemptions
* 8.1 Sales tax exemption
* 8.2 Hotel tax exemption
* 8.2.1 Official mission tax exemptions
* 8.2.2 Personal tax exemption
* 8.3 Other exemptions
* 9 Historical uses
* 10 Fraud
* 11 See also
* 12 References
* 13 External links

## Specific monetary exemptions

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". Similar amounts may be called "personal allowances". Some systems may provide thresholds at which such exemptions or allowances are phased out or removed.[6]

## Exempt organizations

Some governments grant broad exclusions from all taxation for certain types of organization. The exclusions may be restricted to entities having various characteristics. The exclusions may be inherent in definitions or restrictions outside the tax law itself.[7]

### Approaches for exemption

There are several different approaches used in granting exemption to organizations. Different approaches may be used within a jurisdiction or especially within sub-jurisdictions.

Some jurisdictions provide for exemption only from certain taxes. The United States exempts certain organizations from Federal income taxes,[8] but not from various excise or most employment taxes.[9]

### Charitable, nonprofit and religious organizations

Many tax systems provide complete exemption from tax for recognized charitable or nonprofit organizations. Such organizations may include religious organizations (temples, mosques, churches, etc.), fraternal organizations (including social clubs), public charities (e.g., organizations serving homeless persons), or any of a broad variety of organizations considered to serve public purposes.

The U.S. system exempts from Federal and many state income taxes[10] the income of organizations that have qualified for such exemption. Qualification requires that the organization be created and operated for one of a long list of tax-exempt purposes,[11] which includes more than 28 types of organizations and also requires, for most types of organizations, that the organization apply for tax-exempt status with the Internal Revenue Service,[12] or be a religious or apostolic organization.[13][14] 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.[15]

The UK generally exempts public charities from business rates, corporation tax, income tax, and certain other taxes.[16]

Tax exemption status of nonprofit organizations can in some cases result in financial mismanagement and negative societal value.[17]

### Governmental entities

Most systems exempt internal governmental units from all tax. For multi-tier jurisdictions, this exemption generally extends to lower tier units and across units. For example, state and local governments are not subject to Federal, state, or local income taxes in the U.S.[18]

### Pension schemes

Most systems do not tax entities organized to conduct retirement investment and pension activities for employees of one or more employers or for the benefit of employees.[19] In addition, many systems also provide tax exemption for personal pension schemes.[20]

### Educational institutions

Some jurisdictions provide separate total or partial tax exemptions for educational institutions.[21] These exemptions may be limited to certain functions or income.

### Sales tax

Most states and localities imposing sales and use taxes in the United States exempt resellers from sales taxes on goods held for sale and ultimately sold. In addition, most such states and localities exempt from sales taxes goods used directly in the production of other goods (i.e., raw materials).

## Exempt individuals

Certain classes of persons may be granted a full or partial tax exemption within a system. Common exemptions are for veterans,[22] clergymen[23] or taxpayers with children (who can take "dependency exemption" for each qualifying dependent who has lived with the taxpayer. The dependent can be a natural child, step-child, step-sibling, half-sibling, adopted child, eligible foster child, or grandchild, and is usually under age 19, a full-time student under age 24, or have special needs).[24] 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.[25] Definitions of exempt individuals tend to be complex.

## Exempt income

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.[26] Among the more commonly excluded items are:

* Income earned outside the taxing jurisdiction.[27] Such exclusions may be limited in amount.[28]
* Interest income earned from subsidiary jurisdictions.[29]
* Income consisting of compensation for loss.[30]
* The value of property inherited or acquired by gift.[31]

## Exempt property

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.[32]

Among the more commonly granted exemptions are:

* Property used in manufacture of other goods (which goods may ultimately be taxable)
* Property used by a tax exempt or other parties for a charitable or other not for profit purpose
* Property considered a necessity of life, often exempted from sales taxes in the United States
* Personal residence of the taxpayer,[33] often subject to specific monetary limitations

## Multi-tier jurisdictions

Many countries that impose tax have subdivisions or subsidiary jurisdictions that also impose tax. This feature is not unique to federal systems, like the U.S., Switzerland and Australia, but rather is a common feature of national systems.[34] 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.

## Cross-border agreements

Jurisdictions may enter into agreements with other jurisdictions that provide for double taxation relief. 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. 20 of the U.S. states have entered into the Multistate Tax Compact that provides, among other things, that each member must grant a full credit for sales and use taxes paid to other states or subdivisions. The European Union members are all parties to the EU multi-country VAT harmonisation rules.[35]

## Diplomatic tax exemptions

The US provides a few tax exemptions for their diplomatic mission visitors.

### Sales tax exemption

The Department's Office of Foreign Missions (OFM) issues diplomatic tax exemption cards to eligible foreign missions and their accredited members and dependents on the basis of international law and reciprocity.[36]

There are two types of diplomatic sales exemption cards. The mission tax exemption card is used by foreign missions to buy necessary items for the mission. This type of card work only while paying with a cheque, credit card, or wire transfer transaction and must be made in the name of the mission otherwise it is not eligible for the tax exemption. These cards may only be issued to a person, who is a principal member or an employee of the mission, holds an A or G visa, and is not a permanent resident of the US. The personal tax exemption card is issued to eligible foreign mission members for exemption on their personal item purchases. The user of this card is the only person who might use this card on his purchases and he is the only one who can profit from them.

There are 4 levels of exemption cards, and each one holds a name after an animal:

* Owl: This card is for mission tax exemption with no restriction
* Buffalo: This card is for mission tax exemption with some degree of restriction
* Eagle: This card is for personal tax exemption with no restriction
* Deer: This card is for personal tax exemption with some degree of restriction

[37]

### Hotel tax exemption

This is a tax exemption issued for purchases of hotel stays and other forms of lodging. The tax exemption card is required before paying for the lodging, if it is paid before acquiring it, or through the internet, the benefits are unusable.

#### Official mission tax exemptions

These exemptions might only be used for purchases necessary for the mission’s functioning. The mission is only available to be exempt from tax if the mission has a valid tax exemption card, the stay is required in support of the mission’s diplomatic or consular functions and the costs are paid with a cheque, credit card, or a wire transfer in the name of the mission.

#### Personal tax exemption

This card is issued only for the benefit of its holder and may not be used to benefit anyone else. The expenses are only exempt from tax if the person has a valid tax exemption card and the rooms are registered and paid only by the person holding the tax exemption card. [38]

### Other exemptions

Other exemptions in the US include those for vehicles,[39] airlines,[40] gasoline,[41] utilities,[42] and certain types of income.[43]

## Historical uses

Gregory of Tours, in his history of the Franks, claimed that the people of the city of Tours were given tax exemption by the Merovingian kings on account of the presence of the relics of St Martin of Tours and suggested that divine punishment from the saint could fall on anyone who violated this to reimpose taxes.[44]

The inhabitants of Domrémy-la-Pucelle in France, were given tax exemption when Charles VII of France received a request from Joan of Arc to exempt the community (which was her home town) from taxes. This community was exempt from taxes until the time of French revolution, when the republican government restored taxation.[45]

In the Ottoman Empire, tax breaks for descendants of Muhammad encouraged many people to buy certificates of descent or forge genealogies. In the 17th century, an Ottoman bureaucrat estimated that there were 300,000 impostors; In 18th-century Anatolia, nearly all upper-class urban people claimed descent from Muhammad.[46] The number of people claiming such ancestry – which exempted them from taxes such as avarız and tekalif-i orfiye – became so great that tax collection was very difficult.[47]

## Fraud

Some organizations apply fraudulently for tax exemptions.[48]

## See also

* Tax resistance
* Tax shelter

## References

1. ↑ "Tax Expenditures" (in en). 2025-02-08. https://home.treasury.gov/policy-issues/tax-policy/tax-expenditures.
2. ↑ "Federal Individual Income Tax Terms: An Explanation". https://www.congress.gov/crs-product/RL30110.
3. ↑ "Topic no. 701, Sale of your home | Internal Revenue Service" (in en). https://www.irs.gov/taxtopics/tc701.
4. ↑ "Topic no. 506, Charitable contributions | Internal Revenue Service" (in en). https://www.irs.gov/taxtopics/tc506.
5. ↑ "Tax Expenditures Reports | RI Division of Taxation". https://tax.ri.gov/guidance/reports/tax-expenditures-reports.
6. ↑ 26 USC 151, Allowance of deductions for personal exemptions. The amount per exemption is $3,650, subject to phase-out. UK tax free personal allowances vary.
7. ↑ As an example, UK charities law defines the types of organizations which may qualify as registered charities, and places limits on their actions.
8. ↑ 26 USC 501(a). The exemption from Federal income tax is longstanding. This exemption formed part of the Revenue Act of 1894. The 1894 Act was the first broadly applicable U.S. tax on corporate income, but was soon declared unconstitutional. Since ratification of the Sixteenth Amendment to the United States Constitution in 1913, the exemption for charitable, religious, and educational organizations has been included in all subsequent Federal income tax law. See Belknap, Chauncey, "The Federal Income Tax Exemption of Charitable Organizations: Its History and Underlying Policy," 1954, reprinted (very large file) as pages 2025-2043 of the Research Papers of the Commission on Private Philanthropy and Public Needs, Volume IV, 1977.
9. ↑ 26 USC Subtitle D excise taxes are imposed on particular goods or services, generally without exemptions. Certain of these taxes apply primarily to tax-exempt organizations. See, e.g., 26 USC 4911, tax on excess expenditures to influence legislation. 26 USC 3101 and 3301 generally impose social security and unemployment taxes on all organizations. Note that income from certain types of services, such as services as a minister, may be exempt from the definition of income for these taxes. Employees of certain nonprofit and governmental organizations are eligible to participate in different sorts of deferred compensation plans than employees of other organizations. Compare 26 USC 401, IRS Publication 560 and others vs. 26 USC 403(b), IRS Publication 571.
10. ↑ Note that under the U.S. system each state is entitled to raise its own taxes. 43 of the states impose a [state income tax]. Some states incorporate or make reference to Federal definitions for parts of their tax laws. See, e.g., .
11. ↑ 26 USC 501(c)
12. ↑ 26 CFR 1.501(a)-1(a)(2).
13. ↑ 26 USC 501(d).
14. ↑ See IRS Publication 557.
15. ↑ Tax-exempt entities with gross receipts over US$25,000 are required to file annual tax returns on Form 990. Those with less than $25,000 must file a simplified return. The IRS granted an extension of time for such organizations to file for 2009 until October 15, 2010. Charities falling under that revenue threshold have had no regular filing mandate in the past. One list of small organizations is at http://www.501exempt.com .
16. ↑ For a discussion of UK taxation of charities, see the 1999 Review of Charity Taxation Consultation Document .
17. ↑ Gamble, Edward N.; Muñoz, Pablo (2022). "When Tax-Exempt Nonprofits Detract Value from Society". Academy of Management Perspectives 36 (1): 50–92. doi:10.5465/amp.2018.0027. ISSN 1558-9080. https://durham-repository.worktribe.com/preview/1239986/36272.pdf. Retrieved 5 February 2025.
18. ↑ 26 USC 115 specifically excludes from taxable income all income of states or municipalities, as well as income of public utilities. This operates as an exemption from tax for state and municipal governments.
19. ↑ Examples include: a) The United States taxes beneficiaries of trusts, not trusts (with exceptions), but exempts under 26 USC 402 beneficiaries of a pension trust meeting certain qualification; b) Canada ; c) The United Kingdom exempts income and gains of a registered pension scheme from taxation under Income Tax Act section 186, as discussed in the Registered Pension Scheme Manual.
20. ↑ See, e.g., 26 USC 409 providing exemption to owners of Individual Retirement Accounts until funds are distributed.
21. ↑ See, e.g., Malaysian Ministry of Higher Education chart of exemptions and benefits for private higher education institutions.
22. ↑ See, e.g., New York City's veterans property tax exemption.
23. ↑ See, e.g., [26 USC 107] which excludes from income the rental value of a parsonage provided by a church to a clergyman
24. ↑ Presti and Naegele Newsletter , February , 2012.
25. ↑ See the New York City rule cited above.
26. ↑ Contrast 26 USC 101-140 exclusions from gross income to UK non-taxable income.
27. ↑ See International tax for a discussion of territorial tax systems. Most systems exclude from the tax base income of nonresidents from sources outside the taxing jurisdiction. U.S. states and Canadian provinces provide for formulary apportionment of certain business income to achieve a similar result. See, e.g., the Multi State Tax Compact, discussed in a note below.
28. ↑ See, e.g., 26 USC 911, 912.
29. ↑ See, e.g., 26 USC 103, excluding from U.S. Federal taxable income certain types of interest income received on bonds issued by states or political subdivisions thereof.
30. ↑ See, e.g., 26 USC 104, excluding compensation for sickness or injury.
31. ↑ The transfer of such property is often taxed separately to the transferor or the transferee. See Estate tax and Gift tax.
32. ↑ See, e.g., the Texas Sales Tax rules, providing very specific lists of items that are exempt from sales tax. For shortened list of examples of such, see the Grocery and Convenience Stores flyer from the state.
33. ↑ See, e.g., the Homestead Exemption granted in Florida.
34. ↑ See, e.g., Japan's prefecture taxes, UK local rates, etc. .
35. ↑ VAT harmonisation rules
36. ↑ "Sales Tax Exemption". https://www.state.gov/sales-tax-exemption/.
37. ↑ "Sales Tax Exemption". https://www.state.gov/sales-tax-exemption/.
38. ↑ "Hotel Tax Exemption". https://www.state.gov/hotel-tax-exemption/.
39. ↑ "Vehicle Tax Exemption". https://www.state.gov/vehicle-tax-exemption/.
40. ↑ "Airline Tax Exemption". https://www.state.gov/airline-tax-exemption/.
41. ↑ "Gasoline Tax Exemption". https://www.state.gov/gasoline-tax-exemption/.
42. ↑ "Utility Tax Exemption". https://www.state.gov/utility-tax-exemption/.
43. ↑ "Income Tax". https://www.state.gov/income-tax/.
44. ↑ Gregory of Tours. A History of the Franks. Pantianos Classics, 1916
45. ↑ "Famous Foreign Coronations" by Agnes and Jessie Wishart Brown The English Illustrated Magazine No. 224 (May 1902), p. 108
46. ↑ Canbakal, Hülya (2009). "The Ottoman State and Descendants of the Prophet in Anatolia and the Balkans (c. 1500–1700)". Journal of the Economic and Social History of the Orient 52 (3): 542–578. doi:10.1163/156852009X458241.
47. ↑ Acun, Fatma (2002). "The Other Side of the Coin: Tax Exemptions within the Context of Ottoman Taxation History". Bulgarian Historical Review 1 (2).
48. ↑ Helge, Terri Lynn (2017). "Rejecting Charity: Why the IRS Denies Tax Exemption to 501(C)(3) Applicants". Pittsburgh Tax Review. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3040901. Retrieved 2026-03-21.

## External links

* United States:
* IRS Publication 557, Tax-Exempt Status for Your Organization
* IRS FAQs about Tax-Exempt Organizations
* UK:
* HMRC web site
* HMRC manuals by subject

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