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Tax Exemptions Explained

May 16, 2023

Tax exemptions mainly apply to organizations rather than individuals. But if you are a part of an organization or business that could qualify for tax exemptions, then you’ll want to know how they work and how they apply to you.

There are many organizations that, in the right conditions, can qualify for tax exemption status.

Some of these other organizations include labor and agricultural organizations, business leagues, social clubs, veteran's organizations, and more.

If your organization qualifies for tax exemptions then you can save more money and owe less in taxes each year.

Whatever you can save in taxes each year can help your organization financially so it can continue its important work.

Small business owners or members of nonprofit or charitable organizations should especially look into whatever tax exemptions might apply to them.

Check City Offers Both Federal and State Tax Services

What is Tax Exempt?

tax exempt definition

The term tax exempt is a status that some organizations can qualify for if they meet certain requirements. When an organization qualifies for this tax status, it can forego the payment of some or all tax obligations. 

Taxes are payments that members of a community are obligated to pay by the ruling government. Taxes might be imposed upon income, property, and financial transactions. 

Tax exempt organizations are free from having to pay these tax obligations. This can mean the organization is free from having to pay taxes at all or that they are eligible for a tax reduction to pay less in taxes. 

Only eligible organizations can qualify to be tax exempt. Personal exemptions are no longer available to individual taxpayers. Individual taxpayers can instead qualify for tax deductions or tax credits. 

What is a Tax Exempt Form?

So how does tax exemption work? Well, to qualify you first need to fill out a tax exempt form and file that form with your tax return near the beginning of each year. What form you need to fill out depends on the organization. 

There are forms 1023s for charities, religious organizations, and educational organizations. Then there are 8976 forms and 1024 forms for social welfare organizations or other nonprofits. 

Read more about Applying for Tax Exempt Status

Tax Exempt vs Tax Deduction

A tax exemption is when you are free from having to pay a tax obligation. A tax deduction is when you aren't free from having to pay a tax obligation, but you do qualify for that tax obligation to be reduced in the amount you owe. Essentially, with an exemption, you don’t owe anything and with a deduction, you owe less. 

Tax Exempt vs Tax Credit

A tax exemption makes you free from a tax obligation. A tax credit gives you an amount you are eligible to receive. When you qualify for a tax credit you still owe taxes, but the tax credit you receive can make the amount you owe less. If the tax credit amount is bigger than the taxes you owe, then you can get a bigger tax refund

tax deduction vs tax credit

Tax Cuts and Jobs Act of 2017

The Tax Cuts and Jobs Act of 2017 was passed in December 2017. Some of the changes in this act are set up to be reverted back in December 2025. One of the primary reasons for the Tax Cuts and Jobs Act of 2017 was to make tax filing and tax forms easier and simpler for the individual taxpayer. 

Personal exemptions for individuals used to exist but are no longer in effect after 2018. Instead, individual taxpayers can apply for tax deductions and tax credits. 

The Tax Cuts and Jobs Act of 2017 Includes:

tax cuts and jobs act

The following is a simplified list of what the tax cuts and jobs act includes. This list can give you a general understanding of what the act means for the average taxpayer. 

  • Changed itemized deductions 
  • Changed the alternative minimum tax
  • Expanded standard deduction 
  • Expanded the child tax credit 
  • Lowered tax rates
  • Simplified the tax filing process
  • Added new limits to some itemized deductions 

Some other changes that occurred in 2017 include getting rid of personal exemptions and dependent exemptions. Read more details about the act in the following PDF: One Hundred Fifteenth Congress of the United States of America 

Different Kinds of Tax Exemptions

different kinds of tax exemption examples

This status is now reserved for organizations that meet the eligibility requirements set up by the IRS. The following are some of the primary examples of organizations that qualify for this tax status: 

  • Charities
  • Religious Organizations
  • Educational Organizations
  • Social Welfare Organizations
  • Nonprofit Organizations 
  • Bonds

Personal Exemption

After the Tax Cuts and Jobs Act took place in 2017, personal exemptions are no longer available for individuals. But this doesn’t mean that there aren’t other avenues available for individual taxpayers seeking reprieve from tax payments. Eligible individuals can apply for tax deductions, tax credits, and tax withholdings from their paychecks on their W-4 form.

Homestead Exemption

 A homestead exemption can protect homeowners from losing their primary residence in the event of a death in the household. The homestead exemption can also sometimes apply to cases of bankruptcy.

Dependent Exemption

Another exemption that used to exist before 2017 was the dependent exemption. This applied to households that had dependents. A dependent is usually someone in the household who is a child or a relative being cared for. Now individuals and households can use the child tax credit instead. 

Standard Deduction 

With personal exemptions gone you may be wondering what exemptions you can claim on your taxes. Luckily for you, several things were put into place to replace them. Increasing the standard deduction was one of these methods. For example, the standard deduction for a single individual taxpayer was $12,400 in the year 2020, but in the year 2021 it increased to $12,550. 

These increases in the standard deduction for individual taxpayers make it easier for individuals to simply use the standard deduction and do less work when they file tax returns each year.