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Exempt Income

When an individual has income there are sometimes exemptions which they claim on their W-4, these exemptions lower the federal taxes that are deducted from the employee’s net income. There are some types of income that are considered exempt income and therefore no taxes will be taken from the monies received. Many people may question what is exempt income? Who, if anyone, is able to obtain exempt income status? These and other questions have been asked of and answered by the Experts.

What is exempt income?

There are some types of income that in most tax systems are excluded from the base of income that is taxable, and these are often known as exemptions or exclusions. Since most tax systems are highly varied so are the exemptions that they include. Though they may vary, here are a few examples of exempt income: inherited property value, income for compensation for a loss, and income that was earned outside of the taxing jurisdiction. It may be noted that in some tax systems there are exclusions that are specifically excluded and encouraged, these certain exclusions can either very general or very specific.

Is Native American’s income tax exempt?

Since there is no statutory provision that states that Native American’s income is considered to be exempt income, and in most cases their income is subjected to the same income taxes as other citizens and is computed in the same way. This is because treaties regarding Native Americans are usually taken to favor Native Americans, but only when the treaties have language that can be reasonably interpreted as income exclusions. Therefore the income of Native Americans will only be tax exempt if the treaties are able to give support for the status on exempt of taxes. It should also be noted that each treaties only stand to the tribes for which they were written, in other words a member from another tribe is unable to use the exemptions from a treaty made with another tribe.

Is an employer able to change the tax exemption status on an employee’s W-4?

Since the IRS made it where employers are to audit the exempt statuses of employees on their W-4s, employers must monitor the employees’ exempt tax income. The employers can receive penalties for allowing employees to claim more exemptions than they are allowed or for claiming an exempt status that is not justified. So if an employee has claimed exempt status after having already being non-exempt, an employer may change the status back to what it was before the claiming of exempt, to cover them from the IRS penalties. The situations in which an individual may claim income tax exempt are if they received a federal tax refund the previous year and are expecting to receive a federal tax refund this upcoming year. If those criteria are met then an employer cannot change the exemption status on the employee’s W-4 without the permission of the employee.

If an individual is working outside of the United States and had tax-exempt income that was taxed by the foreign country, can Foreign Tax Credit be applied?

The purpose of the Foreign Tax Credit is meant to be used as a tool to relieve taxes being applied by both the United States and the foreign country. Therefore if the interest was not taxed by the United States then there would have been no double taxation by the two countries, thus making the individual unable to apply the Foreign Tax Credits. It should also be noted that an individual cannot take credit for foreign taxes that were either paid or accrued on certain types of income that is to be excluded for the United States gross income.

Exempt Income is income that is exempt of taxes. Exemptions are commonly seen when an individual is filling out their W-4s when starting a job. The exemptions that an individual takes affect the amount of taxes that are withheld from their earnings. There are some things that are considered exempt income, for example inherited property value. For a person to be able to claim exempt status on their W-4 they must meet the criteria of having received a federal tax refund the year previous and expect to receive a federal tax refund the year coming. If an individual has questions that in regards to exempt income they should direct their questions to the Experts.
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