What Is Tax Relief?
Tax relief encompasses various government initiatives aimed at easing the tax burden for individuals and businesses alike. It can take the form of universal tax cuts, targeted programs benefiting specific groups, or initiatives supporting government objectives.
For instance, the child tax credit offers parents a tax break, while credits for green upgrades, like energy-efficient windows, contribute to goals such as energy independence and environmental sustainability.
- Different types of tax relief can assist in reducing your tax liability or resolving tax-related debts.
- Tax deductions enable you to subtract specific expenses, like home mortgage interest, from your taxable income, thus decreasing the amount of tax you owe.
- Tax credits directly reduce your tax bill and may even result in a refund, regardless of whether you owe any tax.
- The IRS Fresh Start program aids individuals and businesses in addressing overdue taxes and preventing tax liens.
Tax Relief Basics
Tax relief programs and initiatives aim to help taxpayers trim their tax bills by offering deductions, credits, and exclusions. Additionally, there are programs designed to assist taxpayers who are behind on their taxes, offering them options to settle their tax-related debts and potentially avoid liens.
Government policy goals often drive changes to the federal tax code. For instance, in response to concerns about insufficient retirement savings in the U.S., Congress introduced incentives to prompt people to save for retirement in tax-advantaged accounts like IRAs and 401(k)s.
Tax relief is also extended to individuals impacted by natural disasters. For instance, the IRS has historically provided tax relief announcements to aid those affected by severe storms, tornadoes, floods, hurricanes, wildfires, and droughts. This relief typically includes filing and payment extensions, waivers for penalties and interests, and deductions for losses due to federally declared disasters.
Tax Deductions
A tax deduction cuts down your taxable income for the year, which helps decrease your tax bill. Taxpayers have the option to either go with the standard deduction or itemize their deductions on Schedule A of Form 1040 or 1040-SR, but they can’t choose both.
Additionally, there are several tax deductions available to taxpayers apart from the standard deduction or itemized deduction. Each type is explained further below.
Standard Deduction
The standard deduction amount depends on factors like your filing status, age, and whether you’re disabled or claimed as a dependent on someone else’s tax return. Here are the standard deduction amounts for the 2023 and 2024 tax years.
| Standard Deductions for 2023 and 2024 | ||
| Filing Status | 2023 Standard Deduction | 2024 Standard Deduction |
| Single | $13,850 | $14,600 |
| Married Filing Separately | $13,850 | $14,600 |
| Head of Household | $20,800 | $21,900 |
| Married Filing Jointly | $27,700 | $29,200 |
| Surviving Spouses | $27,700 | $29,20 |
If you’re at least 65 years old or legally blind by the end of the tax year, you’re eligible for an additional deduction. For tax year 2023, this “extra standard deduction” is $1,500 ($1,850 if you’re filing as single or head of household) if you’re 65 or older or blind. If you’re both 65 or older and blind, this amount doubles. In 2024, the additional standard deduction is $1,550 ($1,950 if you’re single or head of household).
If another taxpayer can claim you as a dependent, your standard deduction for tax year 2023 is limited to the greater of $1,250 or your earned income plus $400 (the total can’t exceed the basic standard deduction for your filing status). For 2024, the standard deduction for a dependent increases to $1,300 or the individual’s earned income plus $450.
Itemized Deductions
Itemized deductions are costs you can subtract from your adjusted gross income to reduce your taxable income and ultimately your tax bill. You can itemize deductions only if you choose not to claim the standard deduction. Opting to itemize makes sense if the total amount you can deduct exceeds the standard deduction for your filing status. Common itemized deductions include:
- Mortgage interest and discount points on the first $750,000 of secured mortgage debt (or $1 million if you bought the home before Dec. 16, 2017)
- Charitable donations
- Unreimbursed medical and dental expenses
- State and local taxes (SALT)
- Certain gambling losses
- Investment interest expenses
Other Deductions
Apart from the standard deduction and itemized deductions, there are other deductions available for taxpayers. For instance, individuals who have paid interest on qualifying student loans may be eligible to deduct up to $2,500 from their taxable income. This deduction applies whether the taxpayer chooses the standard deduction or itemized deduction.
Another deduction is the educator expense deduction, which is aimed at supporting teachers and eligible educators. This deduction allows educators to deduct up to $250 of unreimbursed expenses they’ve incurred for classroom supplies.
Lastly, there’s the health savings account (HSA) deduction, offering a tax advantage for individuals with a high-deductible health plan. Contributions made to an HSA are tax-deductible, reducing taxable income and serving as a way for individuals to save for qualified medical expenses.
Tax Credits
A tax credit is another way the tax system provides relief. Unlike tax deductions that lower your taxable income, tax credits directly decrease the amount of tax you owe.
Here’s how it works: Let’s say a taxpayer opts for the standard deduction, and their tax bill adds up to $3,000. If they qualify for a $1,000 tax credit, their final tax bill would be $2,000. In contrast, with a $1,000 tax deduction, someone in the 22% tax bracket would only save $220.
This kind of tax relief is often referred to as a tax incentive because it rewards taxpayers for expenses that the government considers valuable. For instance, programs like the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) offer tax credits to individuals who pursue post-secondary education programs.
Other popular tax credits include:
- Earned income tax credit (EITC)
- Child tax credit
- Saver’s tax credit
- Health Insurance Marketplace premium tax credit
Tax Exclusions
While tax deductions involve amounts you subtract from your income, tax exclusions designate certain types of income as non-taxable. Consequently, tax exclusions decrease your taxable income and, ultimately, your tax bill. For instance, you can typically exclude child support payments, life insurance death benefits, and municipal bond income from your taxable income.
One common tax exclusion is for employer-sponsored health insurance. The premiums your employer covers are exempt from federal income and payroll taxes, and the portion of premiums you contribute is usually excluded from your taxable income as well. This exclusion of premiums reduces your tax bill, effectively lowering the after-tax cost of your health insurance coverage.
Another widely used tax exclusion applies to selling a house. If you make a capital gain from selling your main home, you can exclude up to $250,000 ($500,000 if married and filing jointly) of that gain from your income. To qualify, you must have owned and lived in the home for at least two out of the previous five years, and you must not have excluded the gain from the sale of another home within the last two years.
Sometimes, income excluded for tax purposes isn’t listed on the return. In other cases, it’s noted in one section of the return and then subtracted in another area.
Tax Debt Relief
The IRS Fresh Start program offers taxpayers a chance to get back on track with their taxes, steering clear of tax liens, levies, wage garnishments, and even potential jail time. Rolled out in 2011, this program introduces a set of adjustments to the U.S. tax code, smoothing out the collection process and providing avenues to settle tax debts for less than the full amount owed. Both individuals and businesses can take advantage of this initiative.
Here are four Fresh Start options for taxpayers who are behind on their tax payments:
- Offer in compromise: This federal program allows you to settle your IRS tax debt for less than the full amount owed. It’s designed for taxpayers facing financial hardship or those unable to pay the full amount at once.
- Currently not collectible (CNC): Under the CNC program, the IRS recognizes that your monthly income is too low to cover your tax debt without causing financial hardship. As a result, collection activities on your debt are paused, and the IRS won’t garnish your wages, seize assets, or levy your bank accounts. You’ll resume payments when you’re financially able.
- Installment agreement: With an IRS installment agreement, you can pay off your taxes gradually through regular monthly payments over an extended period. Keep in mind that interest and penalties may continue accruing until the balance is fully paid.
- Penalty abatement: The IRS may reduce or eliminate penalties from your tax debt if you can demonstrate a valid reason for not paying on time. Acceptable reasons include natural disasters, serious illness, or other extenuating circumstances that prevented timely payment. It’s important to note that a lack of funds alone isn’t considered a sufficient reason for penalty abatement.
Remember, although the Fresh Start program can be beneficial, navigating it isn’t always straightforward, and choosing the right option can be challenging. If you’re dealing with substantial tax debt, it’s wise to seek assistance from a tax professional. They can help you determine the best program for your situation and provide guidance throughout the application process.
What Is the Difference Between a Tax Credit and a Tax Deduction?
Tax credits cut down the actual amount of tax you owe, whereas tax deductions trim your taxable income. Both help you save on your tax bill, but credits offer more significant savings.
For instance, if you have a $1,000 tax credit, it directly reduces your tax bill by $1,000. On the other hand, a $1,000 tax deduction decreases your taxable income by that same amount. So, if you’re in the 24% tax bracket, a $1,000 deduction would lower your tax bill by $240.
What Is the Standard Deduction for 2023 and 2024?
For 2023, the standard deduction is $13,850 for single and married filing separate taxpayers, $20,800 for heads of household, and $27,700 for married filing joint filers and surviving spouses. Each of these amounts increases for 2024. In 2024, the standard deduction for single and married filing separate taxpayers is $14,600, while the standard deduction for heads of household is $21,900. For married filing joint filers or surviving spouses in 2024, the standard deduction is $29,200.
What Is the Annual Gift Exclusion for 2023 and 2024?
The annual exclusion for gifts is $17,000 for 2023 and $18,000 for 2024. That means you can give up to $17,000 (or $18,000) tax-free to as many people as you wish without using any of your lifetime gift and estate tax exemption.
The Bottom Line
Tax relief includes government programs or policies that ease the tax burden for individuals. These typically come in the form of tax deductions, credits, and exclusions. When filing your taxes, be sure to utilize all available options to avoid overpaying. If you’re unsure, it’s wise to seek guidance from a tax professional or financial advisor.
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