Legal Definitions - tax-free

The term tax-free describes income, assets, or transactions that are not subject to taxation by a government authority. This means that the individual or entity receiving, owning, or engaging in the activity does not have to pay specific taxes, such as income tax, sales tax, or capital gains tax, on that particular item or event.

• Example 1: Educational Scholarships

  Imagine a university student who receives a scholarship that covers their tuition and required fees. If the scholarship funds are used solely for these educational expenses, the amount received is typically tax-free. This means the student does not have to report the scholarship money as taxable income on their federal income tax return, and therefore, does not owe income tax on it.

• Example 2: Municipal Bonds

  Consider an investor who purchases municipal bonds, which are debt securities issued by state and local governments to fund public projects. The interest earned on these bonds is often tax-free at the federal level, and sometimes also at the state and local levels if the bondholder resides in the issuing state. This means the investor gets to keep all the interest income without paying taxes on it, making these bonds attractive to certain investors seeking to reduce their tax burden.

• Example 3: Sales Tax Exemptions for Groceries

  In many states, basic groceries, such as fresh produce, milk, and bread, are considered tax-free items at the grocery store. When a consumer purchases these essential food items, no sales tax is added to the price at the checkout. This policy aims to make essential goods more affordable for all residents, as they are exempt from the standard sales tax that applies to most other retail purchases.