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What Is Tax Relief? How It Works, Types, and Example

What Is Tax Relief?

Tax relief is any government program or policy aimed at helping folks and businesses ease their tax burdens or sort out their tax-related debts. It could come as universal tax cuts, targeted programs benefiting specific groups, or initiatives supporting specific government goals.

For example: Take the child tax credit, for instance—it’s a little something that gives parents a tax break if they’ve got minor kiddos. And then there’s the tax credit for green improvements, like energy-efficient windows, working toward the goal of U.S. energy independence and cleaner air.

Key Takeaways:

  1. Different kinds of tax relief can assist in cutting down your tax bill or resolving tax-related debts.
  2. Tax deductions allow you to subtract specific expenses, like home mortgage interest, from your taxable income, ultimately reducing the amount of tax you have to pay.
  3. Tax credits, on the other hand, directly shrink your tax bill and might even result in a refund, even if you don’t owe any tax.
  4. If you’re dealing with back taxes and aiming to steer clear of tax liens, the IRS Fresh Start program is there to aid individuals and businesses in settling things.

Tax Relief Basics

Tax relief programs and initiatives step in to assist taxpayers in trimming down their tax bills through deductions, credits, and exclusions. There are also other programs dedicated to helping taxpayers who may have fallen behind on their taxes, offering a chance to settle their tax-related debts and possibly avoid liens in the process.

When it comes to amending the federal tax code, government policy goals often play a significant role. For instance, in response to concerns about the overall lack of retirement savings in the U.S., Congress introduced incentives to motivate people to save for retirement using tax-advantaged accounts like IRAs and 401(k)s.

Tax relief doesn’t stop there—it’s also available for individuals affected by natural disasters. Take severe storms, tornados, flooding, hurricanes, straight-line winds, wildfires, and droughts, for example. 

The IRS has a history of making tax relief announcements to aid those impacted by such disasters. This relief typically comes in the form of filing and payment extensions, waivers for penalties and interest, and deductions for losses caused by federally declared disasters.

Tax Deductions

A tax deduction is like a magic trick—it shrinks your taxable income for the year, giving your tax bill a friendly nudge downward. Now, when it comes to this deduction business, taxpayers have a couple of choices:

  • They can roll with the standard deduction or get into the nitty-gritty details by itemizing their deductions on Schedule A of Form 1040 or 1040-SR. (Just a heads up, you can’t do both at the same time.)
  • But wait, there’s more! Besides the standard and itemized deductions, there are a bunch of other deductions that a taxpayer can snatch up independently. We’ll dive into each type in more detail below.

Standard Deduction

So, your standard deduction amount isn’t just a random number—it’s based on things like your filing status, age, and whether you’re rocking a disabled status or getting claimed as a dependent on someone else’s income tax return. Now, let’s spill the beans on the standard deduction amounts for the 2023 and 2024 tax years.

Standard Deductions for 2023 and 2024
Filing Status2023 Standard Deduction2024 Standard Deduction
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$29,200

Hey, here’s a neat tidbit for you! If you hit the age of 65 or find yourself legally blind by the end of the tax year, you get to snag an extra deduction. For the tax year 2023, this little bonus is called the “additional standard deduction,” and it’s $1,500 (or $1,850 if you’re rolling solo or head of household) if you’re 65 or older or visually impaired.

Now, here’s the cool part: if you’re both 65 or older and blind, that amount doubles. Fast forward to 2024, and the additional standard deduction becomes $1,550 (or $1,950 if you’re going solo or head of household).

Here’s the lowdown: if some other taxpayer has the claim on you as a dependent, your standard deduction for the 2023 tax year is capped at the larger of $1,250 or your hard-earned income plus $400 (but the total can’t surpass the basic standard deduction for your filing status). Now, fast forward to 2024, and the standard deduction for dependents gets a little boost to $1,300 or the individual’s earned income plus $450.

Itemized Deductions

Let’s talk about itemized deductions—these are expenses that get deducted from your adjusted gross income, playing the hero to lower both your taxable income and that hefty tax bill. Now, here’s the deal.

 you can go the itemized route only if you’re skipping out on the standard deduction. It’s a smart move financially to itemize when the total amount you can subtract is more than the standard deduction for your filing status. Some popular itemized deductions include: 

Let’s chat about some common deductions you can snag:

  1. Mortgage interest and discount points on the first $750,000 of secured mortgage debt (or $1 million if you scored your home before Dec. 16, 2017)
  2. Charitable donations
  3. Unreimbursed medical and dental expenses
  4. State and local taxes (SALT)
  5. Certain gambling losses
  6. Investment interest expenses

Other Deductions

Besides the standard deduction and itemized deductions, there are a few other deductions folks can grab. Check this out: if you’ve paid interest on qualifying student loans, you might be able to slash up to $2,500 from your taxable income. And the cool thing? This deduction is up for grabs whether you roll with the standard deduction or go the itemized route.

Here’s another deduction that’s got teachers’ backs—the educator expense deduction. This one’s specifically for those awesome teachers and eligible educators. With this deduction, educators can cut up to $250 off their taxable income for those classroom supplies they’ve dipped into their own pockets.

Now, let’s talk health—there’s the health savings account (HSA) deduction. This sweet deal is for individuals rocking a high-deductible health plan. The contributions made to an HSA are tax-deductible, giving a nice trim to taxable income and creating a nifty savings route for qualified medical expenses.

Tax Credits

Alright, let’s talk about tax credits—they’re like another flavor of tax relief. Now, unlike tax deductions that give your taxable income a trim, tax credits swoop in and directly slash the actual amount of tax you owe. Here’s the lowdown: Imagine a taxpayer rocking the standard deduction, and their tax bill hits $3,000. Now, if this person is also eligible for a $1,000 tax credit, their final tax bill drops to $2,000.

Now, contrast that with a $1,000 tax deduction, where someone in the 22% tax bracket would only save $220. Alright, let’s dive into this kind of tax relief—it’s often called a tax incentive because it’s the government’s way of giving a little payback to taxpayers for expenses they see as worthwhile. 

Take the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC), for instance—they’re programs that hand out tax credits to folks who decide to jump into post-secondary education programs.

Tax Exclusions

Let’s chat about tax stuff. So, tax deductions are like amounts you subtract from your income, but tax exclusions are a bit different—they tag certain types of income as non-taxable. The cool part?

 These exclusions not only trim down your taxable income but also give your tax bill a little breather. For instance, you can usually exclude from your income things like child support payments, life insurance death benefits, and the income from municipal bonds. Nice, right?

Alright, let’s talk about a familiar tax exclusion—the one that comes with employer-sponsored health insurance. Here’s the deal: the health insurance premiums your employer covers get a free pass from federal income and payroll taxes.

 And even the chunk of premiums you pitch in yourself? Well, that usually gets a pass too, meaning it’s not counted as taxable income. So, what’s the result? Does your tax bill get a trim, and the cost of your health insurance coverage after taxes? Yeah, it takes a bit of a dip.

Alright, let’s talk about another tax perk—this time, it’s the scoop on selling your house. Here’s the deal: if you make a profit (a.k.a. capital gain) from selling your main home, you might be able to exclude up to $250,000 (or $500,000 if you’re married and filing jointly) of that gain from your income. Of course, there are a couple of boxes to tick.

You need to have owned and lived in the home for at least two out of the previous five years, and you can’t have excluded the gain from selling another home in the last two years. Got it? Cool.

Sometimes, the income that’s excluded for tax purposes doesn’t even show up on the return. Other times, you’ll spot it in one section of the return, only to see it pulled out as a deduction in a different area. It’s a bit like a tax two-step, you know?

Tax Debt Relief

Alright, let’s talk about the IRS Fresh Start program—it’s like a helping hand for taxpayers who need to get back on track with their overdue taxes and steer clear of tax liens, levies, wage garnishments, and the big one, jail time. 

Launched back in 2011, this program is a set of tweaks to the U.S. tax code. It smoothes out the whole collection process and opens the door to settling your tax debt for less than the total amount you owe. And guess what? Both individuals and businesses can jump on board with this program.

Here are four Fresh Start options for taxpayers behind on their tax payments:

  • Offer in compromise: Here’s the scoop on this federal program—it’s here to help you settle your IRS tax debt for less than the full amount you owe. So, if you find yourself in a spot where owing more than you can handle at once or paying it off would put a serious strain on your finances, this program has your back.
  • Currently not collectible (CNC): Alright, check out the CNC program—the IRS takes a look and figures out that your monthly income isn’t cutting it to settle your debt without causing some serious financial stress. Here’s the good news: they hit pause on the debt collection game.
  • No bank account levies, wage garnishments, or snatching up your assets. Instead, you get a breather—you can hold off on making payments until you’re in a better spot financially. Cool, right?
  • Installment agreement: Penalty abatement: Gotcha covered with the IRS installment agreement—it’s like a deal that lets you chip away at the taxes you owe through regular monthly payments over a set, extended timeframe. Now, keep in mind, that interest and penalties might keep adding up until you clear that balance in full. Just a little heads-up!
  • Penalty abatement: Alright, let’s talk about the IRS possibly cutting you some slack. They might give you a break by reducing or axing the penalties on your balance. But here’s the deal—you gotta show them that you had a legitimate reason for not paying your taxes on time. Legit reasons could be stuff like fires, natural disasters, or other unexpected chaos. 

Also, if there’s a death, serious illness, or someone in your immediate family is down for the count, that’s considered a reasonable cause too. Oh, and not being able to get your hands on tax-related records can also cut. Just a heads-up though, the IRS makes it clear that simply not having enough cash isn’t a legitimate reason on its own for failing to file or pay on time. Fair warning!

Just a heads-up, the Fresh Start program, while pretty handy, isn’t exactly a walk in the park to figure out. Deciding on the right path to take can be a bit tricky. So, if you’re staring down some hefty tax debt, think about teaming up with a tax professional. They can help you make sure you’re applying for the right program and walk you through the whole process. It’s like having a tax-savvy guide by your side.

What Is the Difference Between a Tax Credit and a Tax Deduction?

Alright, let’s talk about tax perks. Tax credits do some magic by slashing the actual amount of tax you owe, while tax deductions trim down your taxable income. Both are like money-saving superheroes for your tax bill, but here’s the kicker—credits are the heavy hitters when it comes to racking up the most substantial savings. Cool, right?

Let’s break it down with an example: Picture a $1,000 tax credit—bam! It chops your tax bill down by that same $1,000. Now, shift gears to a $1,000 tax deduction—it doesn’t directly cut your tax bill but trims your taxable income by that amount. So, if you’re cruising in the 24% tax bracket, that $1,000 deduction? It’s like a $240 slice off your tax bill. Cool, huh?

What Is the Standard Deduction for 2023 and 2024?

Let’s talk about tax perks. Tax credits do some magic by slashing the actual amount of tax you owe, while tax deductions trim down your taxable income. Both are like money-saving superheroes for your tax bill, but here’s the kicker—credits are the heavy hitters when it comes to racking up the most substantial savings.

Let’s break it down with an example: Imagine you snag a $1,000 tax credit—boom! Your tax bill takes a direct hit, dropping by that sweet $1,000. Now, shift gears to a $1,000 tax deduction—it doesn’t exactly cut your tax bill directly but trims your taxable income by that very amount. So, if you’re cruising in the 24% tax bracket, that $1,000 deduction? It’s like a $240 trim off your tax bill. Cool, right?

Let’s talk about standard deductions for a second. In 2023, if you’re rolling solo or filing separately, you’re looking at a standard deduction of $13,850. Now, if you’re the head of your household, that bumps up to $20,800. But if you’re hitched or a surviving spouse, your standard deduction hits $27,700.

Fast forward to 2024, and there’s a little boost. If you’re flying solo or filing separately, your standard deduction is now $14,600. Heads of households get a bump to $21,900, while those who are married or surviving spouses see their standard deduction rise to $29,200. Nice, right?

What Is the Annual Gift Exclusion for 2023 and 2024?

Let’s chat about gift-giving. So, for 2023, you’ve got an annual exclusion of $17,000, and it’s nudging up a bit to $18,000 for 2024. Here’s the scoop: you can be a generous soul and hand out up to $17,000 (or $18,000) to as many folks as your heart desires, all tax-free. No need to dip into your lifetime gift and estate tax exemption for these thoughtful gestures. Cool, huh?

The Bottom Line

Let’s talk about tax relief—it’s like the government’s way of lightening the load on your taxes. They do this through things like tax deductions, credits, and exclusions. 

When you’re tackling your taxes, it’s smart to make the most of these options so you don’t end up shelling out more than necessary. And hey, if you’re ever unsure, it’s a good move to chat with a tax pro or a financial advisor. They’ve got the know-how to steer you in the right direction.

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