What is Tax Relief?
Tax relief refers to any government initiative or policy aimed at assisting individuals and businesses in lowering their tax loads or settling tax-related arrears.
Tax relief can take the shape of universal tax cuts, tailored programmes that benefit certain categories of taxpayers, or initiatives that support specific government objectives. The child tax credit, for instance, provides a tax benefit to parents of minor children, but the tax credit for green upgrades (such as energy-efficient windows) advances the goals of energy independence and cleaner air in the United States.
Tax Relief Basics
Through tax deductions, tax credits, and tax exclusions, tax relief programmes and initiatives help taxpayers lower their tax liability. Other programmes assist delinquent taxpayers in settling their tax-related debts, so avoiding possible tax liens.
Changing the federal tax law is often prompted by government policy objectives. In response to worries about the widespread lack of retirement savings in the United States, for instance, Congress developed incentives to encourage individuals to save for retirement in tax-advantaged savings accounts, such as IRAs and 401(k)s.
Also eligible for tax assistance are those afflicted by natural calamities. In 2021, for instance, the IRS issued numerous tax relief notices to assist individuals and companies impacted by severe storms, tornadoes, flooding, hurricanes, straight-line winds, wildfires, and drought. Typically, the relief consists of filing and payment delays, remission of penalties and interest, and reductions for casualty and theft losses experienced as a result of federally recognised disasters.
Tax Deductions
A tax deduction lowers your annual tax liability by reducing your taxable income. On Schedule A of Forms 1040 and 1040-SR, taxpayers may either claim the standard deduction or itemise their deductions. (You cannot accomplish both.)
Standard Deduction
The amount of the standard deduction depends on your filing status, age, and whether or not you are disabled or claimed as a dependent on someone else’s tax return. The following are the standard deduction amounts for 2022 and 2023.
| Filing Status | 2022 Standard Deduction | 2023 Standard Deduction |
|---|---|---|
| Single | $12,950 | $13,850 |
| Married Filing Separately | $12,950 | $13,850 |
| Head of Household | $19,400 | $20,800 |
| Married Filing Jointly | $25,900 | $27,700 |
| Surviving Spouses | $25,900 | $27,700 |
You are eligible for an additional deduction if you are at least 65 years old or legally blind by the end of the tax year. For 2022, this “additional standard deduction” for those 65 or older or blind is $1,400 ($1,750 if filing as single or head of household) The amount increases by twofold if you are 65 or older and blind. In 2023, the additional standard deduction will increase to $1,500 (or $1,850 for individuals and heads of household).
If another taxpayer can claim you as a dependant in 2022, your standard deduction is restricted to the greater of $1,150 or your earned income + $400 (the total cannot exceed your filing status’ basic standard deduction). The standard deduction for a dependant in 2023 is $1,250 or the individual’s earned income + $400, whichever is greater.
Itemized Deductions
These expenses can be deducted from your adjusted gross income to reduce your taxable income and tax liability. Only those who do not claim the standard deduction may itemise their deductions. If the total amount you can deduct is larger than the standard deduction for your filing status, it makes financial sense to itemise. These are common itemised deductions:
Interest and discount points on the first $750,000 of secured mortgage debt (or $1 million if the home was purchased prior to December 16, 2017) are deductible.
- Charitable donations
- Unreimbursed medical and dental expenses
- State and local taxes (SALT)
- Certain gambling losses
- Investment interest expenses
Tax Credits
Tax credits are an additional type of tax relief. Unlike tax deductions, which reduce your taxable income, tax credits reduce your tax liability directly.
Here is an illustration. Suppose a taxpayer claims the standard deduction and has a tax liability of $3,000. If the individual is additionally entitled for a $1,000 tax credit, his or her total tax liability would be $2,000. With a $1,000 tax deduction, a person in the 22% tax bracket would only save $220.
This sort of tax relief is frequently referred to as a tax incentive because it reimburses taxpayers for government-approved spending. The American opportunity tax credit (AOTC) and the lifelong learning credit (LLC) programmes, for example, provide tax benefits to those who enrol in postsecondary education programmes. Additional common tax credits include:
- Earned income tax credit (EITC)
- Child tax credit
- Saver’s tax credit
- Health Insurance Marketplace premium tax credit
Tax Exclusions
Tax deductions are sums deducted from taxable income, whilst tax exclusions exclude specific types of income from taxation. Consequently, tax exclusions minimise your taxable income and tax liability. In general, you can exclude from your income child support payments, life insurance death benefits, and revenue from municipal bonds.
Employer-sponsored health insurance is a popular exception from taxes. Employer-paid health insurance premiums are normally free from federal income and payroll taxes, and the percentage of premiums you pay is generally not taxable. The exclusion of premiums reduces your tax liability, hence reducing the cost of health insurance coverage after taxes.
Another frequent tax exemption is the sale of a home. If you have a capital gain from the sale of your primary residence, you can exclude up to $250,000 of that gain from your income ($500,000 if filing jointly). To qualify, you must have owned and resided in the property for at least two of the preceding five years, and you cannot have deducted the gain from the sale of another home in the preceding two years.
In some instances, tax-exempt income is not reported on the tax return. In other instances, it is entered in one section of the return and subsequently subtracted from another.
Tax Debt Relief
The IRS Fresh Start programme assists people in catching up on their taxes and avoiding tax liens, wage garnishments, and imprisonment. Initiated in 2011, the programme is a series of reforms to U.S. tax legislation that streamlines the collection process and allows you to settle your tax obligation for less than the entire amount you owe. Individuals and companies qualify for the programme.
Here are four Fresh Start options available to individuals who have fallen behind on their tax payments:
This government programme allows you to settle your tax liability with the IRS for less than the total amount owed. The programme is accessible to taxpayers who owe more money than they could fairly pay all at once, or if doing so would cause them financial hardship.
Currently not collectable (CNC): Under the CNC programme, the IRS finds that your gross monthly income is insufficient to pay what you owe in a reasonable manner without causing financial hardship. The IRS will not charge your bank accounts, garnish your income, or confiscate your possessions to collect your debt. Instead, you defer payments until you are in a position to pay.
Instalment agreement: An IRS instalment agreement allows you to pay the taxes you owe in monthly instalments over a specified, extended period of time. Interest and penalties may continue to accrue until the balance is settled in full.
Penalty abatement: The IRS may lower or remove penalties from your account, but you must first demonstrate that you had a valid reason for paying late. Reasonable cause includes fire, natural disasters, and other disruptions; the death, serious sickness, or incapacity of the taxpayer or a close family member; and the inability to access tax-related records. According to the IRS, a lack of finances is not a valid excuse for failing to file or pay taxes on time.
Keep in mind that, despite being beneficial, the Fresh Start programme is not always simple to navigate, and picking which path to pursue might be challenging. If you have large tax debt, you should consider dealing with a tax expert who can ensure that you apply to the right programme and guide you through the application process.
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