What Qualifies You to Be a Tax-Exempt Individual or Organization in the US?
Taxes are mandatory for individuals, corporations, and many types of organizations in the US. The government uses the money collected from taxes to fund social welfare schemes such as education, development, healthcare, research, protection of the environment, etc. While the government expects US residents to fulfill their tax obligations, it also grants tax exempt status to some individuals and organizations under certain circumstances. This article will help you understand the concept of tax exemption, and the categories of individuals and entities like 501(c)(3) nonprofit organizations that are tax-exempt.
What is Tax Exemption?
Tax exemptions exclude some types of incomes, revenues, or taxpayers from the obligation of paying taxes. Such exemptions reduce the amount of taxable income at the federal, state, or local level. The Internal Revenue Service (IRS) allows a variety of exemptions for individuals and organizations. For example, Transparent Hands, a 501(c)(3) nonprofit organization, has tax-exempt status.
How You Can Get Tax Exemption Easily in the US
Tax Exemptions for Individuals:
Some broad categories of US taxpayers are expected from taxes. Let’s explore some of these categories that apply to individuals.
Overseas US Citizens:
American citizens living and working overseas and earning up to $126,500 are tax-exempt. The amount will increase to $130,000 for the tax year 2025. Some overseas Americans are also allowed to deduct housing costs from their income provided they are foreign residents or have physically resided in a foreign country for at least 330 days in a year. For further details, you can visit the relevant IRS page.
Taxpayers in the low-income bracket or with many dependents:
If your income is less than your standard deduction, you may not have to pay or file taxes. For example, this applies to married couples earning less than $29,220 (for the tax year 2024). You can check out the filing thresholds for taxes here. Similarly, lower-income families supporting dependent children might not have to pay taxes if they qualify for the Earned Income Tax Credit.
Deductions as a way of reducing taxes:
In some instances, taxpayers can claim deductions to reduce their tax burden. For example, if you have a large medical bill, you can claim it as an unreimbursed medical expense on Schedule A. In addition, a donation you make to a 501(c)(3) nonprofit organization may also be deducted from the taxable income. This can significantly reduce your taxable income and might even bring it below the taxable threshold. For further details, you can visit the IRS page here.
Tax Exempt Income Sources (For individuals)
Certain types of tax exemptions also benefit individuals. For example, interest earned on municipal bonds issued by the government is tax-exempt at the federal level. Let’s explore some common tax-exempt income sources.
Why You Should Donate to Transparent Hands for Tax Exemption
Health Saving Account Withdrawals
A Health Savings Account (HSA) is a tax-advantaged savings account for individuals enrolled in a high-deductible health plan. The money deposited into an HSA is tax-exempt, and HSA funds can accumulate over time. The earnings in the HSA aren’t taxed.
Qualified Roth IRA Distributions
Roth Individual Retirement Accounts also allow tax-free growth from your contributions until you start withdrawing money during your retirement. Roth IRAs are very flexible because they constitute the amount that has already been taxed. Generally, taxes don’t apply to account growth unless certain conditions are met.
Tax Exemption on Capital Gains
Capital Gains take place when someone buys an asset and sells it later for a profit. While capital gains are generally taxable, a taxpayer can offset them with capital losses during the same year. This strategy can result in significant savings.
Tax Exempted Organizations:
While specific categories of individuals can enjoy certain tax exemptions and deductions, some organizations are granted tax-exempt status by the IRS. Let’s explore some of these tax-exempt organizations.
501(c)(3) Nonprofit Organizations
Organizations that meet specific requirements and are founded for religious, scientific, educational, or charitable purposes are tax-exempt under Internal Revenue Code Section 501(c)(3).
Charitable Organizations:
NGOs and other entities registered as 501(c)(3) nonprofit organizations are not meant for profit-making and have no taxable income. Their revenue cannot benefit individuals or private shareholders. In addition, when you donate to a 501(c)(3) nonprofit organization like Transparent Hands, the contribution can bring you significant tax benefits.
Churches and Other Religious Organizations:
Churches and other religious organizations may also qualify for tax exemptions from federal income tax under Section 501(c)(3).
Private Foundations:
Private foundations can qualify for tax-exempt status under Section 501(c)(3). They typically have one significant funding source, an ‘endowment,’ from an individual, family, or corporation.
501(c)(4) Nonprofit Organizations
Organizations categorized as 501(c)(4) are also tax-exempt. This category comprises civic leagues and social welfare organizations that are allowed to lobby and participate in political activities. A significant difference between 501(c)(4) and 501(c)(3) organizations is that the latter offers tax benefits to the donors as well.
With the information provided in this article, you can improve your understanding of what it means to be tax-exempt and whether you can get tax exemption as an individual or organization. Transparent Hands is a 501(c)(3) nonprofit organization with tax-exempt status that raises funds through online crowdfunding. We provide surgical and medical treatments to needy patients and arrange free medical camps to reach the most deserving communities with limited or no access to quality healthcare services. Our medical camps offer free medical checkups, medicines, lab tests, and educate the attendees by holding preventive healthcare sessions. Transparent Hands values its donors and prioritizes transparency. You can see how your donations change lives and help the most deserving people and communities. We acknowledge your donations and provide tax receipts for contributions. Donate now to transform someone’s life and receive significant tax benefits.
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