Legal Definitions - tax-exempt

Tax-exempt describes a status where an entity, property, or income is legally excused from paying certain taxes that would otherwise apply. This exemption is typically granted by government authorities to encourage activities or investments considered beneficial to the public, or to support specific types of organizations.

Here are some examples:

• A local community food bank, which operates as a non-profit organization, is often granted tax-exempt status. This means it does not have to pay federal income tax on the donations it receives or on any revenue generated from its charitable activities. Additionally, in many jurisdictions, the property it owns and uses for its operations, such as its warehouse and distribution center, may be exempt from local property taxes.

  This illustrates how a non-profit organization dedicated to public welfare can be exempt from various taxes, allowing it to dedicate more resources directly to its mission of feeding those in need rather than paying taxes.

• An individual invests in bonds issued by a state's public university system to finance new dormitories. The interest income earned from these specific bonds might be exempt from federal income tax, and potentially from state and local income taxes if the investor resides in that state.

  This demonstrates how certain investments, particularly those funding public projects, can offer tax-exempt interest income, making them an attractive option for investors seeking to reduce their tax liability on investment earnings.

• A historic preservation trust acquires and maintains an old lighthouse, opening it to the public for educational tours. Because the trust is organized as a non-profit dedicated to preserving historical landmarks for public benefit, the lighthouse property itself is often exempt from local property taxes.

  This shows how property owned by certain organizations serving a public good, like historical preservation, can be granted tax-exempt status, reducing the financial burden of ownership and allowing the organization to focus on its preservation and educational goals.