What does tax exempt mean under US Code 26 ?

what does tax exempt meanUnder Internal Revenue Code there are certain kinds of income which are exempt at the hand of recipient of such income. .  In fact the easiest answer to the question “What does tax exempt mean?” would be an example of a person earning $4000 in  tax year. Now his status would be tax exempt because under the IRC , income upto  $4050 in the tax year is non-taxable. So such a person will be considered  tax exempt during tax year 2017  on account of personal tax exemption.

are churches tax exempt ? Answer is yes and like church other social organization or charitable trusts and  NGOs also can be  granted tax exempt status under US Code 26 if certain conditions are fulfilled .

Similarly following organization that are tax exempt under IRC 501(c)(12) i.e  their income is free from federal tax liability

  • benevolent life insurance associations of a purely local character
  • mutual ditch or irrigation companies
  • mutual or cooperative telephone companies
  • mutual or cooperative electric companies
  • “like organizations”

Tax exemption & employees

When a tax exempt employee  fill out Form W-4 , employers need not withhold any federal income tax from their wages. However , unless an employees meet following  qualifications to be tax exempt, withholding can not be be prevented :

  1. In the previous year, the employee had the right to a refund of all federal income tax withheld from their wages because they had no tax liability.
  2. In the current year, the employee expects a refund of all federal income tax withheld because they plan to have no tax liability.

No Automatic Tax Exemption under State Law

But , the employee who has tax exempt status under federal law ( IRC) can not  automatically claim exemption from state or local income taxes. In some states, Form W-4 might or might not exempt the employee from state or local income taxes. The employee might need to fill out a different form for state or local withholding. Because the laws are different everywhere, you should check with your state and local laws.If an employee needs help determining if they are exempt from taxes, direct them to IRS Publication 505.


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