In tax terminology, what is meant by the term 'exempt'?

In tax terminology, the term 'exempt' generally refers to the condition where an individual or entity is free from federal income tax withholding under specific circumstances. This can occur, for example, when a taxpayer qualifies for certain exemptions such as low income or when they meet specific criteria that indicate they will not owe federal tax for the year, thus they are not subject to withholding.

This understanding aligns with how tax exemptions can provide relief or potential benefits based on individual financial situations or classifications. Therefore, option B accurately encapsulates the concept of being exempt from federal income tax withholding under given conditions, which is a key aspect of how tax obligations can be determined for individuals.

In contrast, the other options misconstrue the application of the term 'exempt' by suggesting broader absolution from all taxes or focusing on state income taxes or specific tax types like capital gains taxes, which do not fall under the general use of the term in the context of federal income tax withholding.