What is Tax Exempt

Habirhaseeb

· 25 Nov 2021

What is Tax Exempt

What is Tax-Exempt income?

Tax exemption is the power to remove tax from your income. Though it may vary from one country’s government to the other whether you are fully exempted, partially exempted, or not exempted at all which is the case most often.
Let us first understand what income is and then skip towards further knowledge.

Income

Income is money received after serving for a particular time regularly. Based on taxation, it is divided into two categories.

Taxable income Vs. Non-taxable income

As the name states, it is taxed income which they owe the government in a given tax year. It includes all of your wages, bonuses, tips, and investments. Typically both unearned and earned income goes under this category.
Non-taxable income is tax-exempt income. Whether or not you enter it on your tax return, the income is deemed non-taxable. The list below provides some examples of different types of tax-exempt income ways.

Who is exempted from tax?

1. Gifts

The giver is the one who sends a gift and the receiver receives it. In these cases, tax is exempted to the receiver, however, the giver is not exempted from tax and will pay full price for it. However, the recipient might face capital gains tax if he/she sells the gift in the future. Surprisingly not all gifts are taxed, some leave the giver not to be taxed. Such include gifts send,
•    As tuition fees
•    Donations to charity foundations
•    For medical expenses
•    To dependents

2. Disability wages

A temporary or permanently disabled employee is eligible for disability pay. They will only be taxed if the disability payment comes from an insurance policy which the employer-paid. These payments generally fall under non-taxable income, some of which are,
•    Compensation due to injury or sickness
•    Private disability insurance
•    Supplemental disability insurance

3. States without income tax

States which do not have a state income tax will be considered to give tax exempted wages to the employees. Sounds unreal, but there are few states which give out tax exempted wages,
•    Wyoming
•    Tennessee
•    South Dakota
•    Nevada
•    Alaska
•    New Hampshire
•    Washington
•    Texas

4. Life insurance payouts

The insurance policy paid out to an individual due to someone’s death will not be taxed unless and until the policy is not cashed in. Only the interest in this case which is the amount received by the individual above the cost of the policy will be taxed.

5. Scholarships

Many students receive scholarship aid to progress their studies. Some even receive extra financial aid and, / or do paid work/assignments given by the university or follow through with any occurring apprenticeship. This type of payment received is always exempted from tax. But, it is reported as of how the payment is used and what for. Unless and until the payment is used to buy course books or pay for school courses, it will not be taxed. But if this payment is used for extracellular or even to pay for dorm fees, then it shall be marked as taxable income.
As always, stay in touch with your accounts administrator to find out more about wages.

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