Tax Exemption

Exemptions take different forms. Some income is exempt altogether, such as certain government benefits, interest on some government bonds or gains on a main home in some countries. Some organisations, such as registered charities, may be exempt from income tax on their charitable activities. Some goods, such as basic foods in certain countries, may be exempt from sales tax or value-added tax.

The term is also used for a fixed amount of income that is not taxed, sometimes linked to the taxpayer or their dependants. For example, a system might exempt the first 10,000 of each person's income, so someone earning 35,000 pays tax only on 25,000.

Exemptions differ from deductions and credits. An exemption removes income or activity from the tax base altogether, a deduction reduces taxable income because of a qualifying expense, and a credit reduces the tax owed directly.

Governments use exemptions to support particular groups or activities, reduce the tax burden on low incomes or encourage certain behaviour. Because exemptions vary widely between countries and change over time, local rules determine what is exempt.