Tax-Exempt
The status of income, entities, or transactions not subject to certain taxes, such as nonprofit organizations, municipal bond interest, or qualified retirement plan earnings.
Tax-Exempt
The status of income, entities, or transactions not subject to certain taxes under specific provisions of tax law, creating opportunities for tax-free income generation or operations.
For example, 501(c)(3) charitable organizations are typically exempt from federal income taxes on activities related to their exempt purpose, while interest earned on qualifying municipal bonds is generally exempt from federal income tax for the bondholders, regardless of their income level.
Tax exemption applies in multiple contexts: organizational (nonprofits, religious organizations, and educational institutions), income types (certain disability benefits, some life insurance proceeds, qualifying municipal bond interest), transaction types (like-kind exchanges, certain corporate reorganizations), and investment vehicles (Roth IRAs, 529 college savings plans, Health Savings Accounts). Exempt status typically requires meeting specific criteria and may be limited—organizations may still pay tax on unrelated business income, and municipal bond interest may still be subject to state taxes or alternative minimum tax calculations. Maintaining proper documentation is essential, as tax authorities may require verification of exempt status.