Tax Relief Definition

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Tax Relief Definition

What Is Tax Relief?

Tax relief refers to any government initiative or policy that assists people and companies in lowering their tax loads or resolving tax-related obligations.

Tax relief may take the shape of universal tax cuts, tailored programs that benefit certain categories of taxpayers, or efforts that support specific government aims. The child tax credit, for example, provides a tax benefit to parents of minor children, while the tax credit for green upgrades (e.g., energy-efficient windows) helps the United States achieve energy independence and better air.

Key Takeaways

  • Different sorts of tax relief might assist you in lowering your tax bill or settling tax-related issues.
  • Tax deductions allow you to deduct certain costs (such as house mortgage interest) from your taxable income, decreasing your tax liability.
  • Tax credits decrease your tax bill immediately and may result in a refund even if you do not owe any tax.
  • Individuals and corporations may use the IRS Fresh Start program to pay outstanding taxes and avoid tax liens.

Understanding Tax Relief

Tax relief programs and efforts assist people in lowering their tax payments by using tax deductions, credits, and exclusions. Other programs assist taxpayers who are behind on their taxes in settling their tax-related bills, perhaps avoiding liens.

Government policy objectives are often the impetus for altering the federal tax law. For example, in response to worries about the widespread lack of retirement savings in the United States, Congress established tax-advantaged savings accounts, such as IRAs and 401(k)s, to encourage individuals to prepare for retirement.

Tax assistance is also provided to those who have been harmed by natural catastrophes. For example, in 2021, the IRS announced numerous of tax relief announcements to assist people and companies impacted by severe storms, tornadoes, floods, hurricanes, straight-line winds, wildfires, and drought. Filing and payment delays, penalty and interest exemptions, and discounts for casualty and theft losses experienced as a result of federally declared disasters are common forms of relief.

You cannot deduct insurance-covered casualty and theft losses unless you make a timely claim for reimbursement and decrease the loss by your expected payout.

Tax Deductions

A tax deduction lowers your taxable income for the year and hence your tax obligation. On Schedule A of Form 1040 or 1040-SR, taxpayers may accept the standard deduction or itemize their deductions. (You can’t have it both ways.)

Standard Deduction

The standard deduction amount is determined by your filing status, age, and whether you are handicapped or listed as a dependant on the income tax return of someone else. The following are the standard deduction amounts for the tax years 2021 and 2022.

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Standard Deductions for 2021 and 2022
Filing Status2021 Standard Deduction2022 Standard Deduction
Single$12,550$12,950
Married Filing Separately$12,550$12,950
Head of Household$18,800$19,400
Married Filing Jointly$25,100$25,900
Surviving Spouses$25,100$25,900

If you are at least 65 years old or legally blind before the end of the tax year, you are eligible for an additional deduction. If you are 65 or older or blind, the “extra standard deduction” for 2021 is $1,350 ($1,700 if filing as single or head of household). If you are 65 or older and blind, the sum doubles. In 2022, the increased standard deduction will be $1,400 ($1,750 if single or head of household).

If you may be claimed as a dependant by another taxpayer, your standard deduction for 2021 is restricted to the greater of $1,100 or your earned income plus $350 (the sum cannot exceed the basic standard deduction for your filing status). In 2022, the deduction cannot exceed $1,150 or your earned income plus $400.

Itemized Deductions

Itemized deductions are costs that may be deducted from your adjusted gross income in order to reduce your taxable income—and hence your tax burden. Only if you do not take the standard deduction can you itemize your deductions. If the total amount you may deduct exceeds the standard deduction for your filing status, itemizing makes financial sense. Typical itemized deductions are:

Tax relief often targets particular taxpayers, such as individuals who have incurred unexpected bills as a result of a storm or a wildfire.

Tax Credits

Another kind of tax relief is a tax credit. Unlike tax deductions, which decrease your taxable income, tax credits reduce the amount of tax you owe immediately.

Here’s an illustration. Assume a person accepts the standard deduction and has a tax bill of $3,000. If the individual is additionally entitled for a $1,000 tax credit, their total tax obligation is $2,000. In example, someone in the 22% tax bracket would save just $220 with a $1,000 tax deduction.

Tax credits are preferable to tax deductions since they decrease your total tax liability rather than simply your taxable income.

This sort of tax relief is sometimes referred to as a tax incentive since it reimburses taxpayers for expenditures deemed desirable by the government. People who participate in post-secondary education programs, for example, are eligible for tax credits under the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). Other well-known tax breaks include:

Tax Exclusions

Tax deductions are sums deducted from your income, whilst tax exclusions make some forms of income non-taxable. As a result, tax exclusions lower your taxable income—and hence your tax obligation. For example, you may normally deduct child support payments, life insurance death benefits, and municipal bond revenue from your income.

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Employer-sponsored health insurance is a frequent tax exclusion. Health insurance premiums paid by your employer are free from federal income and payroll taxes, and the percentage of premiums you pay is normally not taxable. The exclusion of premiums reduces your tax burden, lowering the after-tax cost of health insurance coverage.

If you earned money while living in another country, you may be eligible for the foreign earned income exclusion and the foreign housing exclusion. To be eligible, you must be a US citizen or resident alien who has lived in a foreign nation for an unbroken period that encompasses the whole tax year.

Another frequent tax break is the sale of a home. If you have a capital gain on the sale of your primary residence, you may deduct up to $250,000 ($500,000 if married filing jointly) from your income. You must have owned and resided in the property for at least two of the previous five years to qualify, and you must not have deducted the gain from the sale of another home during the prior two years.

In certain circumstances, income that is not taxable is not reported on the tax return. In other circumstances, it is noted in one part of the return before being deducted in another.

Tax Debt Relief

The IRS Fresh Start program assists taxpayers in catching up on unpaid taxes while avoiding tax liens, levies, wage garnishment, and prison time. The program, which began in 2011, is a series of improvements to the United States tax legislation that simplifies the collection process and allows you to settle your tax obligation for less than the entire amount you owe. The program is open to both individuals and corporations.

For taxpayers who are overdue on their tax payments, here are four Fresh Start options:

  • Offer in compromise: This federal program assists you in settling your IRS tax liability for a lower amount than you owe. The program is accessible to taxpayers who owe more money than they can possibly pay all at once or who would face financial difficulty if they did.
  • Currently not collectable (CNC): The IRS considers that your gross monthly income is too low to pay what you owe without causing financial hardship under the CNC program. Your debt is no longer being collected, and the IRS will not levy your bank accounts, garnish your income, or take your possessions. Instead, you postpone payments until you are financially equipped to do so.
  • Installment agreement: An IRS installment agreement allows you to pay your taxes by making regular monthly payments over a certain period of time. Interest and penalties may continue to accrue until your debt is paid in full.
  • Penalty reduction: The IRS may decrease or erase penalties from your debt, but you must first demonstrate that you have a justifiable cause for failing to pay your taxes on time. Reasonable reason includes fires, natural disasters, and other disruptions; the taxpayer’s or a member of their immediate family’s death, significant sickness, or incapacity; or an inability to access tax-related documents. It is worth noting that the IRS specifies that “a lack of finances, in and of itself, is not a valid basis for failing to file or pay on time.”
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Keep in mind that, although beneficial, the Fresh Start program is not always straightforward to navigate, and picking which path to choose might be difficult. If you owe a lot of money in taxes, consider dealing with a tax expert who can help you apply to the right program and assist you through the process.

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

Tax credits decrease the amount of tax owed, while tax deductions reduce taxable income. Both reduce your tax burden, but credits give the most significant savings. A $1,000 tax credit, for example, reduces your tax burden by $1,000. A $1,000 tax deduction, on the other hand, reduces your taxable income by that amount. So, if you are in the 24% tax bracket, a $1,000 deduction will save you $240 on your taxes.

What Is the Standard Deduction for 2021?

The standard deduction for single and married filing separately taxpayers is $12,550 in 2021, $18,800 for heads of household, and $25,100 for married filing jointly filers and surviving spouses.

What Is the Standard Deduction for 2022?

The standard deduction for single and married filing separately taxpayers is $12,950 in 2022, $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 yearly gift exclusion rises to $16,000 in 2022, up from $15,000 in 2021. This means you may contribute up to $16,000 tax-free to as many individuals as you like without exhausting your lifetime gift and estate tax exemptions.

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