What is “Tax Exempt?”

Tax documents and keyword

Chances are, you’ve heard the term “tax exempt” tossed around before. Like many others, you may be left wondering, what is tax exempt, exactly? Better yet, who qualifies to be tax exempt? You’ve come to the right place! Here, the friendly professionals from Xpress Cash will cover what it means to be tax exempt, the different types of tax-exempt income, and the qualifications that exist for someone to be exempt from taxes.

What Does it Mean to Be Tax Exempt?

The term “tax exempt” is used to describe certain forms of income or transactions which are free from tax at a federal, state, or local level. Tax-exempt items must be reported on a taxpayer’s personal tax return or, if applicable, on a business’ business tax return – but only for informational purposes, as the tax-exempt item will not be included in any calculations.

What is Tax Exempt Income?

“Tax exempt” and “tax deduction” are commonly confused. The latter reduces your overall tax obligation, while the former does not require the taxpayer to submit taxes on the tax-exempt item at all. Some common types of tax-exempt income include: 

  • Interest Earned on Municipal Bonds – Municipal bonds are bonds issued by states and cities to raise funds for a project. If a taxpayer earns interest income on any municipal bonds issued in their state, those earnings are free from federal and state taxes.
  • Workers’ Compensation Benefits – If you are injured in a work-related accident and are receiving workers’ comp benefits, the income you receive from workers’ comp is tax exempt.
  • Supplemental Security Income (SSI) Benefits – If you are receiving SSI benefits, your income is not taxed on a federal or state level.
  • Child Support Payments – Income earned for child support is tax exempt.
  • Dependent Exemptions – If you have any dependents to list on your tax report, you can exclude taxable income of up to $4,200 (as of 2019) for each dependent.

Who Qualifies for Tax Exemption?

You may be wondering, are there any sets of criteria that can deem an individual 100% tax exempt? Yes, there are certain groups of people who are not required to pay income taxes:

  • Someone who is single, under the age of 65, and earning less than $12,000 per year
  • Someone who is married, under the age of 65, and earning less than $24,000 per year
  • Someone who is single, over the age of 65, and earning a gross income of $13,600 or less
  • Someone who is married, over the age of 65, and earning less than $25,300 per year
  • A widow(er) who is over the age of 65, with a dependent child, and earning less than $25,300 per year

Contact Xpress Cash for Additional Help

Do you have income that is tax exempt? If so, you may be able to use the information to help you get a bigger tax refund. If you’re still unsure, don’t hesitate to reach out to the team at Xpress Cash for further assistance! We’re always here to help with your most pressing questions, whether they’re surrounding taxes or any other financial topic. Visit one of our many Michigan locations to start a conversation today.