Paying taxes is a civic duty that all citizens and residents of the United States are expected to fulfill. However, there are some groups and organizations that are exempt from paying certain taxes due to their special status or nature of activities.
Individuals
There are certain individuals who may qualify for tax exemption in the US. Some of the common categories include:
Low income individuals
Individuals who fall below a certain income threshold are not required to pay federal income tax. For 2022, the thresholds are:
- Single filers with income below $12,950
- Married filing jointly with income below $25,900
- Head of household filers with income below $19,400
These individuals may still need to pay other taxes such as payroll taxes or state taxes, but they are exempt from federal income tax.
Children
Children under age 18 generally do not have to file an income tax return if their unearned income is less than $1,100 for the year or their earned income is less than $12,550. This exempts most children from paying federal income tax.
Senior citizens
For low income senior citizens over 65, some of the common tax exemptions include:
- Higher standard deduction thresholds
- No tax on Social Security benefits if total income is under $25,000 (single) or $32,000 (married filing jointly)
- Tax credit for the elderly and disabled
People with disabilities
People who are declared disabled by licensed physicians may be eligible for certain tax exemptions such as:
- Exclusion of certain disability income from taxes
- Higher standard deduction
- Tax credit for the elderly and disabled
Dependent filers
Dependent filers who are claimed by someone else as a dependent are exempt from paying income tax if:
- They are under age 19 or
- They are a full time student under age 24 or
- Their gross income is less than $4,300
Unemployed individuals
Unemployment benefits received from state agencies are not considered taxable income for federal tax purposes. So unemployed individuals who have no other source of income may be exempt from filing and paying federal income tax.
Non-profit organizations
Non-profit organizations that meet certain criteria such as being organized for religious, charitable, scientific, literary or educational purposes are exempt from paying federal and/or state corporate income taxes. To qualify, they must apply for tax-exempt status from the IRS.
Religious organizations
Churches, temples, mosques, synagogues and other religious associations are automatically considered tax-exempt without needing to apply to the IRS. They do not pay income tax provided that their activities align with their tax-exempt purpose.
Charitable organizations
Public charities that are organized and operated exclusively for charitable purposes qualify for 501(c)(3) tax exemption. Some examples are food banks, animal shelters, museums, orchestras, public radio/TV etc.
Social welfare organizations
Organizations that promote social welfare like civic leagues or community volunteer groups are exempt from federal income tax under section 501(c)(4).
Labor organizations
Labor unions, teachers’ associations and other labor organizations are tax-exempt under section 501(c)(5) provided their activities align with their purpose.
Governments
Federal, state and local governments, their agencies and political subdivisions are exempt from federal income taxes.
Some examples are:
- Federal agencies like Department of Labor, EPA etc.
- State colleges and universities
- Public schools and libraries
- City police departments
- County courts
They are exempt because the income they generate is used for public purposes to provide governmental services.
Farmers and Fishermen
Certain farmers and fishermen may qualify for tax exemptions on a portion of their earned income. Some key exemptions include:
- Income averaging which allows smoothing of fluctuations in income over prior years
- Deductions for costs like feed, seed, fertilizer etc.
- Property tax deductions
- Conservation easement deductions
- Depreciation deductions on farm equipment and buildings
These exemptions allow reducing taxable income significantly for qualifying farmers and fishermen.
Foreign Diplomats
Foreign diplomats including embassy staff who work in the United States may qualify for exemption from federal and state taxes.
To qualify, they must have a foreign diplomatic passport and be accredited by the U.S. State Department. Their income from foreign sources is exempt from U.S. tax.
Military Service Members
Active duty military members have special tax considerations that may exempt parts of their income from federal taxes. Some key exemptions include:
- Combat pay exclusion
- Foreign earned income exclusion
- Tax breaks on homes for veterans
- No state taxes on active duty pay
Veterans also get certain tax exemptions after completing their active duty term.
Native Americans
Enrolled members of a federally recognized tribe are exempt from paying state income taxes on income they earn from working on their own tribe’s reservation lands. Other key tribal tax exemptions include:
- Special federal deductions for enrolled members
- No federal excise tax on goods sold on reservations
- No federal fuel taxes on fuel delivered to reservations
Homeowners
Homeowners receive significant tax breaks that can reduce or eliminate their tax liability:
- Mortgage interest deduction – interest paid on up to $750,000 of mortgage principal is tax deductible
- Property tax deduction – eliminates state and local property taxes from federal taxable income
- Capital gains exemption – married couples can exclude up to $500,000 of capital gains on a primary residence
Businesses
Certain types of businesses also receive tax exemptions or credits that can significantly reduce their federal tax liability:
- Pass-through entities like Sole Proprietorships, LLCs and S-Corps allow owners to pass business income through to their personal returns
- Research and Development Tax Credit provides credit for increasing research activities
- Work Opportunity Tax Credit for hiring target groups like veterans
- Accelerated depreciation allows faster write offs of capital expenditures
Retirement Accounts
Income earned within retirement accounts like 401(k)s and IRAs grows tax-deferred until withdrawal. Key benefits include:
- No tax on investment gains annually
- Contributions often deductible from taxable income
- Tax-free growth over long term
Withdrawals are taxed as ordinary income when taken in retirement.
Education Savings Accounts
Education savings accounts like 529 plans and Coverdell ESAs provide tax exemption for funds used towards education expenses. Benefits include:
- No tax on investment growth
- Some states allow deduction for contributions
- Tax-free withdrawals for tuition, books, computers etc.
Conclusion
In summary, individuals like children, seniors, unemployed and disabled may qualify for income tax exemption under certain conditions. Non-profit organizations like charities and governments are exempt from corporate income taxes. Other groups like farmers, diplomats, military and Native Americans have special considerations. Finally, certain assets like homes, retirement accounts and education savings receive tax deferred or exempt treatment.
However, most exemptions come with specific eligibility criteria. It is important for taxpayers to evaluate their individual situation carefully or consult a tax advisor before claiming any exemption.