Key Takeaways
- Tax relief programs help individuals and businesses lower tax bills and settle tax-related debts.
- Tax credits directly reduce a tax bill and can even provide refunds.
- Tax deductions reduce taxable income, lowering the overall tax burden.
- The IRS offers debt relief options like installment agreements and penalty abatements to assist with outstanding taxes.
- Tax exclusions set aside certain types of income as non-taxable, reducing overall taxable income.
What Is Tax Relief?
Tax relief is any government policy that helps individuals and businesses reduce tax bills or resolve tax debts, improving cash flow. It can include broad tax cuts, targeted programs, or tools like deductions, credits, and exclusions, such as the Child Tax Credit (CTC) and Earned Income Tax Credit (EITC), and understanding these options can support smarter filing and planning.
How Government Policies Provide Tax Relief
Tax relief programs help taxpayers reduce their tax bills through tax deductions, credits, and exclusions. Other programs help taxpayers settle their tax-related debts.
Government policy goals may help revise the federal tax code. For example, in response to concerns about the general lack of retirement savings in the U.S., Congress created incentives to encourage savings in tax-advantaged accounts such as IRAs and 401(k)s.
Tax relief is also available for those affected by natural disasters like storms, tornados, flooding, hurricanes, straight-line winds, wildfires, and drought. The relief typically includes filing and payment extensions, penalty and interest waivers, and deductions for casualty and theft losses sustained due to federally declared disasters.
Important
A tax deduction reduces taxable income for the year, thereby lowering a tax bill. Taxpayers can take the standard deduction or itemize their deductions on Schedule A of Form 1040 or 1040-SR.
Understanding the Standard Tax Deduction
The standard deduction amount is based on filing status, age, and whether the taxpayer is disabled or claimed as a dependent on someone else’s income tax return. The standard deduction amounts change every year.
Individuals age 65 or older or legally blind by the end of the tax year are entitled to an additional standard deduction if single or head of household.
Maximizing Tax Savings Through Itemized Deductions
Itemized deductions are expenses subtracted from adjusted gross income to lower income and tax bills. Individuals can itemize their deductions only if they don’t claim the standard deduction. It makes financial sense to itemize if the total amount is greater than the standard deduction. Common itemized deductions include:
Exploring Additional Tax Deductions
- Student Loans: Taxpayers who have paid interest on qualifying student loans may be able to deduct up to $2,500 from their taxable income. This deduction can be taken whether the taxpayer takes the standard deduction or itemized deduction.
- Educator Expenses: This deduction allows educators to deduct up to $250 of unreimbursed expenses incurred for classroom supplies.
- Health Savings Account (HSA): A tax advantage for individuals with a high-deductible health plan. Contributions to an HSA are tax-deductible, reducing taxable income and providing individuals with savings for qualified medical expenses.
Leveraging Tax Credits for Financial Relief
Unlike tax deductions, which lower taxable income, tax credits directly reduce the tax individuals owe. Suppose a taxpayer takes the standard deduction and their tax bill amounts to $3,000. If the person is also eligible for a $1,000 tax credit, their final tax bill would be $2,000.
This type of tax relief is often described as a tax incentive because it reimburses taxpayers for expenditures the government deems worthwhile. For example, the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) programs give tax credits to people who enroll in post-secondary education programs. Other popular tax credits include:
Tax Exclusions: Keeping More of Your Income
Tax exclusions set aside certain types of income as non-taxable and reduce taxable income. For example, taxpayers can exclude child support payments, life insurance death benefits, and municipal bond income.
A common tax exclusion is employer-sponsored health insurance. Health insurance premiums are exempt from federal income and payroll taxes, and the portion of premiums paid is generally excluded from an individual’s taxable income.
Those with a capital gain from the sale of a primary residence home can exclude up to $250,000 ($500,000 if married and filing jointly) of that gain from their income.
Understanding Debt Relief Options With the IRS
The IRS Fresh Start program helps taxpayers catch up on back taxes and avoid tax liens, levies, wage garnishments, and jail time. The program streamlines the tax collection process. Individuals and businesses are eligible for the program which offers several options:
- Offer in compromise: This federal program helps settle IRS tax debt for less than the full amount owed.
- Currently Not Collectible (CNC): Under the CNC program, the IRS determines that gross monthly income is too low to reasonably pay what is owed without triggering financial hardship. The collection is halted and payments are deferred.
- Installment agreement: An IRS installment agreement lets individuals pay taxes they owe by making regular monthly payments over a specific, extended timeframe. Interest and penalties may accrue.
- Penalty abatement: The IRS may reduce or remove penalties due to reasonable causes including fire, natural disasters, and other disturbances; the death, serious illness, or incapacitation of the taxpayer or a member of their immediate family; or an inability to obtain tax-related records.
What Is the Difference Between a Tax Credit and a Tax Deduction?
What Is the Annual Gift Exclusion?
Taxpayers can give up to a certain amount tax-free to as many people as they wish without using any of their lifetime gift and estate tax exemption. The exclusion amount adjusts every year.
The Bottom Line
Tax relief can come through deductions, credits, exclusions, or debt-relief programs that help individuals and businesses manage what they owe. Deductions reduce taxable income, while credits cut the tax bill directly, and programs like the IRS Fresh Start can help with back taxes via installment plans and possible penalty relief.
