What Is Tax Relief?
Tax relief refers to any government program or policy designed to help individuals and businesses reduce their tax burdens or resolve their tax-related debts.
Tax relief may be in the form of universal tax cuts, targeted programs that benefit specific groups of taxpayers, or initiatives that bolster particular goals of the government. For example, the child tax credit gives a tax break to parents of minor children, while the tax credit for green improvements (e.g., energy-efficient windows) furthers the goal of U.S. energy independence and cleaner air.
- Various types of tax relief can help you lower your tax bill or settle tax-related debts.
- Tax deductions let you deduct certain expenses (such as home mortgage interest) from your taxable income, thereby lowering the amount of tax you owe.
- Tax credits directly reduce your tax bill and may provide a refund even if you don't owe any tax.
- The IRS Fresh Start program helps individuals and businesses settle back taxes and avoid tax liens.
Tax Relief Basics
Tax relief programs and initiatives help taxpayers reduce their tax bills through tax deductions, credits, and exclusions. Other programs help taxpayers who are behind on their taxes settle their tax-related debts, potentially avoiding liens in the process.
Government policy goals are often the catalyst for amending 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 people to save for retirement in tax-advantaged savings accounts—such as IRAs and 401(k)s.
Tax relief is also available for people affected by natural disasters. For example, the IRS made dozens of tax relief announcements in 2022 and 2023 to help individuals and businesses affected by severe storms, tornados, flooding, hurricanes, straight-line winds, wildfires, and drought. The relief typically comes in the form of filing and payment extensions, penalty and interest waivers, and deductions for casualty and theft losses sustained due to federally declared disasters.
You can't deduct casualty and theft losses covered by insurance unless you file a timely claim for reimbursement and reduce the loss by your anticipated reimbursement.
A tax deduction reduces your taxable income for the year, thereby lowering your tax bill. Taxpayers can take the standard deduction or itemize their deductions on Schedule A of Form 1040 or 1040-SR. (You can't do both.)
The standard deduction amount is based on your filing status, age, and whether you are disabled or claimed as a dependent on someone else's income tax return. Here are the standard deduction amounts for the 2022 and 2023 tax years.
|Standard Deductions for 2022 and 2023|
|?Filing Status||2022 Standard Deduction||2023 Standard Deduction|
|Married Filing Separately||$12,950||$13,850|
|Head of Household||$19,400||$20,800|
|Married Filing Jointly||$25,900||$27,700|
You can take an extra deduction if you are at least age 65 or legally blind by the end of the tax year. For tax year 2022, this "additional standard deduction" is $1,400 ($1,750 if filing as single or head of household) if you are 65 or older or?blind. The amount doubles if you are 65 or older and blind. The additional standard deduction for 2023 is $1,500 ($1,850 if single or head of household).
If another taxpayer can claim you as a dependent, your standard deduction for tax year 2022 is limited to the greater of $1,150 or your earned income plus $400 (the total can't be more than the basic standard deduction for your filing status). For 2023, the standard deduction for a dependent is $1,250 or the individual's earned income plus $400.
Itemized deductions are expenses that can be subtracted from your adjusted gross income to lower your taxable income—and tax bill. You can itemize your deductions only if you don't claim the standard deduction. It makes financial sense to itemize if the total amount you can deduct is greater than 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
Tax relief often targets specific taxpayers, such as those facing unexpected costs due to a hurricane or a wildfire.
A tax credit is another form of tax relief. Unlike tax deductions, which lower your taxable income, tax credits directly reduce the amount of tax you owe.
Here's an example. Say 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. By comparison, with a $1,000 tax deduction, someone in the 22% tax bracket would save just $220.
Tax credits are more favorable than tax deductions because they reduce the amount of tax you owe, not just your taxable income.
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:
- Earned income tax credit (EITC)
- Child tax credit
- Saver's tax credit
- Health Insurance Marketplace premium tax credit
While tax deductions are amounts you deduct from your income, tax exclusions set aside certain types of income as non-taxable. As such, tax exclusions reduce your taxable income—and your tax bill. For example, you can generally exclude from your income any child support payments, life insurance death benefits, and municipal bond income you receive.
A common tax exclusion is the one for employer-sponsored health insurance. Health insurance premiums your employer pays are exempt from federal income and payroll taxes, and the portion of premiums you pay is generally excluded from your taxable income. The exclusion of premiums lowers your tax bill, effectively reducing your after-tax cost of health insurance coverage.
If you earned income overseas, you might be eligible for the foreign earned income exclusion and the foreign housing exclusion. To qualify, you must be a U.S. citizen or resident alien who is a resident of a foreign country for an uninterrupted period that includes the entire tax year.
Another popular tax exclusion pertains to selling a house. If you have a capital gain from the sale of your main home, you can exclude up to $250,000 ($500,000 if married 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.
In some cases, income excluded for tax purposes is not recorded on the return. In other cases, it is recorded in one section of the return and then deducted in another area.
Tax Debt Relief
The IRS Fresh Start program helps taxpayers catch up on back taxes and avoid tax liens, levies, wage garnishments, and jail time. Launched in 2011, the program is a group of changes to the U.S. tax code that streamlines the collection process and makes it possible to settle your tax debt for less than the total amount you owe. Individuals and businesses are eligible for the program.
Here are four Fresh Start options for taxpayers behind on their tax payments:
- Offer in compromise: This federal program helps you settle your IRS tax debt for less than the full amount you owe. The program is available to taxpayers who owe more money than they could reasonably pay at once—or if doing so would create a financial hardship.
- Currently not collectible (CNC): Under the CNC program, the IRS determines that your gross monthly income is too low to reasonably pay what you owe without triggering financial hardship. Collection is halted on your debt, and the IRS won't levy your bank accounts, garnish your wages, or seize your assets. Instead, you defer making payments until you're financially ready to pay.
- Installment agreement: An IRS installment agreement lets you pay the taxes you owe by making regular monthly payments over a specific, extended timeframe. Interest and penalties may continue accruing until you pay your balance in full.
- Penalty abatement: The IRS may reduce or remove penalties from your balance, but you must first prove that you had a legitimate reason for not paying your taxes on time. Reasonable cause includes 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. Note that the IRS states that "a lack of funds, in and of itself, is not reasonable cause for failure to file or pay on time."
Keep in mind that, while helpful, the Fresh Start program isn't necessarily easy to navigate, and deciding which avenue to pursue can be tricky. If you have significant tax debt, consider working with a tax professional who can make sure you apply to the appropriate program and guide you through the process.
What Is the Difference Between a Tax Credit and a Tax Deduction?
Tax credits lower the amount of tax you owe, while tax deductions reduce your taxable income. Both save you money on your tax bill, but credits provide the most substantial savings.
For example, a $1,000 tax credit lowers your tax bill by that same $1,000. Meanwhile, a $1,000 tax deduction lowers your taxable income by that amount. So, if you fall into the 24% tax bracket, a $1,000 deduction would shave $240 off of your tax bill.
What Is the Standard Deduction for 2023?
For 2023, the standard deduction is $13,850 for single and married filing separately taxpayers, $20,800 for heads of household, and $27,700 for married filing jointly filers and surviving spouses.
What Is the Standard Deduction for 2022?
For tax year 2022, the standard deduction is $12,950 for single and married filing separately taxpayers, $19,400 for heads of household, and $25,900 for married filing jointly filers and surviving spouses.
What Is the Annual Gift Exclusion for 2022?
The annual exclusion for gifts is $17,000 for 2023, up from $16,000 in tax year 2022. That means you can give up to $17,000 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 constitutes government programs or policies that help lessen the burden of taxes for individuals. These are usually done through tax deductions, credits, and exclusions. When filing your taxes, make sure you take advantage of all of these options so that you don't end up paying more taxes than you need to. When in doubt, consult with a tax professional or financial advisor.
Internal Revenue Service. "Child Tax Credit."
Internal Revenue Service. "Energy Incentives for Individuals: Residential Property Updated Questions and Answers."
Internal Revenue Service. "Credits and Deductions for Individuals."
Internal Revenue Service. "Tax Relief in Disaster Situations."
Internal Revenue Service. "Topic No. 515 Casualty, Disaster, and Theft Losses."
Internal Revenue Service. "About Schedule A (Form 1040), Itemized Deductions."
Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2023."
Internal Revenue Service. "Topic No. 551 Standard Deduction."
Internal Revenue Service. "Rev. Proc. 2021-45," Page 14.
Internal Revenue Service. "Revenue Procedure 2022-38," Page 14.
Internal Revenue Service. "Revenue Procedure 2022-38," Page 13.
Internal Revenue Service. "Topic No. 501 Should I Itemize?"
Internal Revenue Service. "Instructions for Schedule A: Itemized Deductions," Pages 1-13.
Internal Revenue Service. "Lifetime Learning Credit."
Internal Revenue Service. "American Opportunity Tax Credit."
Internal Revenue Service. "Publication 550, Investment Income and Expenses (Including Capital Gains and Losses)," Page 12.
Internal Revenue Service. "Publication 525, Taxable and Nontaxable Income," Pages 22, 31.
Internal Revenue Service. "Employee Benefits."
Internal Revenue Service. "Topic No. 502 Medical and Dental Expenses."
Internal Revenue Service. "Foreign Earned Income Exclusion."
Internal Revenue Service. "Topic No. 701 Sale of Your Home."
Internal Revenue Service. "The IRS Fresh Start Program Can Help You Pay Your Taxes."?
Internal Revenue Service. "Offer in Compromise."
Internal Revenue Service, Taxpayer Advocate Program. "Currently Not Collectible."
Internal Revenue Service. "Additional Information on Payment Plans."
Internal Revenue Service. "Penalty Relief Due to Reasonable Cause."
Tax Deductions and Credits Guide
What Is Tax Relief? How It Works, Types, and Example
Tax Benefit: Definition, Types, IRS Rules
Tax Break Definition, Different Types, How to Get One
Tax Deductions That Went Away After the Tax Cuts and Jobs Act
Tax Credits That Can Get You a Refund
Nonrefundable Tax Credit: Definition, How It Works, and Benefits
Earned Income Tax Credit (EITC): Definition and How to Qualify
Saver’s Tax Credit: A Retirement Savings Incentive
Unified Tax Credit: Definition and Limits
General Business Credit (GBC): What it is, How it Works
Foreign Tax Credit: Definition, How It Works, Who Can Claim It
Dependents: Definition, Types, and Tax Credits
How Much Does a Dependent Reduce Your Taxes?
Child and Dependent Care Credit Definition
Child Tax Credit Definition: How It Works and How to Claim It
Additional Child Tax Credit (ACTC): Definition and Who Qualifies
What Was the Hope Credit? How It Worked and Replacement
American Opportunity Tax Credit (AOTC): Definition and Benefits
Tax Deduction Definition: Standard or Itemized?
Itemized Deductions: What It Means and How to Claim
Tax-Deductible Interest: Definition and Types That Qualify
Charitable Contribution Deduction: Rules and Changes for 2022 and 2023
20 Medical Expenses You Didn’t Know You Could Deduct
Educator Expense Deduction
Top Tax Advantages of Buying a Home
Calculating the Home Mortgage Interest Deduction (HMID)
Tax Breaks for Second-Home Owners
Rental Property Tax Deductions
Getting U.S. Tax Deductions on Foreign Real Estate
401(k) vs. IRA: What’s the Difference?
IRA Contributions: Deductions and Tax Credits