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What is the Tax-Exempt Sector?

On Behalf of | Nov 5, 2022 | Tax Appeals

As a Georgia taxpayer, do you know what a tax-exempt sector is? This term has two meanings that either refer to investment instruments that are not taxable by the Internal Revenue Service or non-profit organizations that do not have to pay taxes.

What are tax-exempt investments?

Tax-exempt investments include certain bonds, leases, bond funds, mutual funds, money market funds, trusts, life insurance and Roth IRA-earned income. Other common tax-exempt investments are health savings account (HSA) distributions, fixed annuities and some education savings account distributions. Municipal bonds are the most common, as they allow local and state taxing bodies to raise money for various projects. They generally have a lower yield than other types of bonds. Municipal bonds come in two types: general obligation bonds and revenue bonds.

What type of organizations are tax-exempt?

About 1.7 million businesses in various sectors are considered tax-exempt organizations by the IRS. These include organizations operated entirely for religious reasons, charities, public safety testing groups, and literary and educational entities. Other organizations can qualify for tax-exempt status if they qualify under IRS Code Section 501(c)(3). These businesses do not have to pay federal taxes and, in some cases, may not have to pay sales taxes on specified items. Charitable donations to tax-exempt organizations are tax-deductible for taxpayers who make those contributions.

The U.S. tax code is complicated

The U.S. tax code confuses many people, yet they insist on doing their own taxes. Sometimes doing so can result in not following income tax instructions properly, taking deductions where none apply, or making other mistakes that can result in a tax audit.

All businesses should keep detailed documents to back up claims on their tax status.