Question

what is the differecne between being exempt from income tax and having a property tax exemption. please go into detail, I am having great difficulty with this.

Answer 1

First of all, we know that Meaning of Tax Exempt

Then we will see what is the difference between exempt from income tax and property tax exemption.

Tax-exempt refers to income or transactions that are free from tax at the federal, state, or local level. The reporting of tax-free items may be on a taxpayer's individual or business tax return and shown for informational purposes only. The tax-exempt article is not part of any tax calculations.

Tax-exempt may also refer to the status of a business or organization which has limits on the amount of income or gifts which are taxable. These organizations include religious and charitable institutions.Not to be confused with a tax deduction, tax-exempt frees the taxpayer of any tax obligation to submit taxes on the tax-free transaction or income. Whereas, the use of a tax deduction is to reduce the tax obligation by lowering gross income.

One common type of tax-exempt income is interest earned on municipal bonds, which are bonds issued by states and cities to raise funds for general operations or a specific project. When a taxpayer makes interest income on municipal bonds issued in their state of residence, the profit is exempt from both federal and state taxes.

Taxpayers receive IRS Form for any investment interest they earn during the tax year. The reporting of tax-exempt interest is in box 8 of the 1099 form.This informational only data are not included in the calculation of personal income taxes.

Exempt income refers to certain types or amounts of income not subject to federal income tax. Some types of income may also be exempt from state income tax. The IRS determines which types of income are exempt from federal income tax as well as the circumstances for each. Congressional action plays a role as well, as what is exempted and the threshold amounts are often tweaked or changed entirely.

Exempt Income:-

Exempt income rules underwent certain changes under the Tax Cuts and Jobs Act signed into law in December 2017. For example, the Act eliminated personal exemptions from tax years 2018 to 2026 but roughly doubled the child tax credit and the standard deduction. The latter reduced taxable income by $12,000 for individual filers and $24,000 for married couples filing jointly for tax year 2018. (The standard deduction for tax year 2017 was $6,500 for single filers and $13,000 for married couples).The Act specifically raises the exemption and phase out levels for the alternative minimum tax, which is typically levied on individuals earning income above a certain threshold.Types of Exempt Income

There are several types of income and benefits that are nontaxable under certain circumstances. Several health-related benefits are tax exempt including benefits from employer-sponsored supplemental disability insurance purchased with after-tax dollars, private insurance plans funded with after-tax dollars, most benefits from employer-sponsored health insurance plans, and worker's compensation.

Gifts that exceed a certain value can trigger a gift tax on the person providing the gift. However, any gift worth less than $15,000 (as of 2018) is exempt from income tax. Regardless of value, certain gifts including tuition and medical expenses paid for someone else and charitable donations are income tax exempt. The latter is also tax-deductible.

Property Tax Deduction :-
State and local property taxes are generally eligible to be deducted from a property owner's federal income taxes, creating the property tax deduction. Deductible real estate taxes include any state, local, or foreign taxes that are levied for the general public welfare. They do not include taxes charged for home renovations or for services like trash collection.

As noted below, the Tax Cuts and Jobs Act capped the property tax deduction, along with other state and local taxes, starting with 2018 taxes. Previously, the full amount of property taxes was eligible for federal tax deductions for those who itemized their deductions.

The owner of a property must pay taxes, assessed annually by a state and/or local government, on the value of the property. A property owner can claim a tax deduction on some or all of the property taxes paid if they use the property for personal use and itemize deductions on their federal tax return.

The real estate taxes that can be deducted includes taxes paid at closing when buying or selling a home and taxes paid to a county or town’s tax assessor on the assessed value of the personal property. Personal property, according to the Internal Revenue Service (IRS), may include a taxpayer’s main home, vacation home, land, or foreign property.

To claim a property tax deduction, the tax must only apply to the value of the personal property owned and be charged on an annual basis, irrespective of when the government collects it from you. Therefore, if the state tax was only charged at the time the property was purchased then it does not meet the IRS definition of a deductible personal property tax.

As stated earlier, property tax can only be deducted if the owner chooses to itemize their deductions. It makes sense for a taxpayer to itemize deductions if the sum of all their eligible itemized expenses is greater than the standard deduction allowed in a given tax year.