Paying taxes is considered a civic duty because governments use tax revenue to fund public services for social development and economic growth. Taxes may seem like a headache for the commoner but can be an unbearable burden for some with more financial responsibilities than others. Fortunately, there is some reprieve for certain groups of individuals, and being tax-exempt might be an excellent way to lower your tax bill.
No US citizen is exempt from paying federal or state taxes. However, their incomes can be exempt from taxation so that they wouldn’t owe anything. These people are exempt from filing because they don’t owe any tax because they do not earn any income or other tax provisions. In a nutshell, being tax-exempt means that some or all of an individual’s income is free from federal, local, and state taxes.
There are five key categories of US taxpayers that are free from the federal tax process. They are as follows:
Nonprofit Organizations
Under Section 501(c)3 of the IRC, any entity that falls under the category of nonprofit organization is exempt from income taxes. These include educational, religious, and humanitarian entities like hospitals, homeless shelters, churches, universities, and other groups established to improve social welfare. Since these organizations do not earn any profits or contribute to the betterment of society, they do not have to pay taxes.
US Citizen Who Work Overseas
You are not required to pay taxes on the income earned in the US if you live and work overseas. Americans can earn up to $126,500 by working abroad before they’re required to pay taxes for the tax year 2024. This amount will be raised to $130,000 for the tax year 2025, thanks to a foreign-earned income exclusion offered by the IRC.
Certain expatriates are also liable for extra benefits, such as being able to exclude or deduct housing costs from their incomes. However, a taxpayer must meet certain requirements in order to qualify. One condition is that they must be residents of a foreign country for at least 330 full days a year.
Those With Low Income
Those who earn income that is not more than the standard deduction for the filing status are not required to file a tax return or pay taxes. For example, a married couple should earn at least $29,200 in the year 2024 if each spouse is under 65 years of age if they want to file a tax return in 2025. This amount will be raised to at least $30,000 for the tax year 2025.
Taxpayers With Several Deductions
Some taxpayers can write off almost all, if not all, their taxable incomes by claiming deductions. For example, a person who incurs a huge medical bill can claim this on Schedule A as an unreimbursed medical expense. Doing this can significantly reduce the taxable income, even to the point where it comes under the taxable threshold.
However, doing so also means itemizing the deductions. You cannot itemize to claim the expenses and get the standard deduction for your filing status as well. Therefore, you should choose between the two.
Schedule A includes many itemized deductions. You can add them and compare them with the standard deduction amount for what you qualify for and then use the more considerable option. Otherwise, you may have to pay taxes on more income than you should.
Taxpayers Who Have Several Dependents
Families categorized as lower-income and with dependent children can be exempted from paying taxes if they qualify for EITC (Earned Income Tax Credit) and other child-related tax credits. A married couple with three or more children can be eligible for a maximum EITC of $8,046 for the tax year 2025. These exemptions are not a deduction from income; tax credits subtract from the tax bill dollar for dollar.
Even taxpayers who don’t have children can qualify if they have other dependents. A single person without children can claim a maximum of $649 for the tax year 2025.
Why Tax Exemption Is Important
- Nonprofit organizations benefit society, and by not being taxed, they can maintain funds to better serve the community.
- Nonprofit organizations relieve the burden that would otherwise be upon the government. For instance, a shelter can provide homeless people with a safe place to get food and care, and hospitals can offer healthcare for people that the government would otherwise have to provide on its own.
- It gives low-income families a break from paying taxes, allowing them to use their income to build their lives and harvest a better future for their children
- Offers relief to business owners who do not make any profits in a given year, preventing business from going bankrupt and giving them an opportunity to do better next year.
Final Thoughts
A person’s income, filing status, age, ability, and other factors determine their obligation to file for taxes. As listed above, certain groups are tax-exempt because they serve the community. In other cases, people can be free from the burden of paying taxes owing to their poor income and situations, such as those who are disabled or those who are dependent on another for income, welfare benefits, and supplemental security income, which people with disabilities receive.
The tax code is not just used to collect revenue; rather, it is also utilized to reward and encourage certain activities. For instance, taxpayers who pay taxes can limit their liability by taking advantage of available tax credits like the saver’s credit, child care credits, and education credits that can be claimed for course materials and tuition fees.
The requirement to pay taxes is not voluntary, but some people are exempted from it. Remember that taxes are not all bad, even if you don’t fall under exempt groups. Taxes are used to keep the country up and running while also benefiting citizens through social security payments, organized law enforcement, social services, national defense, and community development, to name a few.
If you are a taxpaying citizen, you can hold your head high, knowing that your contributions have helped your nation develop. If you are not, there are many other ways, apart from money, that you can do the same for your country!
