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What Is a Tax Exemption?

Tax exemption refers to the reduction and the elimination of taxes. This applies to both individuals and groups (including businesses and charitable organizations). The government is the entity that provides guidelines for tax exemptions.

Individuals may be exempt from taxes under certain circumstances - either partially or fully. Depending on the country or state, full tax exemption is applicable if an individual falls under a certain income bracket. Alternatively, in some places, tax exempt categories exist. For example, clergymen may be considered tax exempt individuals.

Partial tax exemption for individuals refers to part of the income that is not taxed. Income that is tax exempt again depends on the location. Examples include income that is earned outside of the country, gifts, and income received as compensation for loss. For military personnel, combat pay is tax exempt.

For organizations, there are also different ways of approaching tax exemption. In some places, certain groups are automatically exempt from paying taxes. These groups have to fall under categories as determined by the government. Charitable organizations and churches usually fall under this category. Furthermore, businesses that are located in special economic zones enjoy tax exemptions.

Tax exemptions for business organizations may depend on various factors. For example, the government will look at the source of income, the organization’s purpose, and the organization’s activities. Depending on these things, the organization may qualify for full tax exemption.

Sales tax exemption applies under certain conditions. Again, the government makes the decisions regarding the conditions. These could be as simple as designated days or periods within the year or when a disaster occurs.

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