What is Tax Relief?
What is Tax Relief?
Tax relief is any program or policy that the government offers to individuals or businesses to reduce or eliminate their tax debts.
There are many options for tax relief. These include universal tax cuts, targeted programs to benefit certain taxpayers, and initiatives that support specific goals. The child tax credit, for example, gives parents of minor children a tax break, while the tax credit for green improvements (e.g. energy-efficient windows) helps the United States achieve its goal of energy independence and cleaner air.
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KEY TAKEAWAYS
- many types of tax relief can be used to lower your tax bill and settle tax-related debts.
- Tax deductions allow you to deduct certain expenses, such as interest on a home mortgage, from your taxable income. This allows you to lower the amount of tax that you owe.
- Tax credits can directly reduce your tax bill, and may even provide a refund, even if no tax is owed.
- IRS Fresh Start helps individuals and companies pay back taxes and avoid a tax lien.
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Understanding Tax Relief
Through tax credits, deductions, and exclusions, tax relief programs and initiatives can help taxpayers lower their tax bills. Some programs assist taxpayers with tax debts to reduce their tax bills and avoid liens.
Sometimes, the federal tax code is amended by government policy goals. In response to concerns over the lack of retirement savings in the United States, Congress created incentives for people to save in tax-advantaged savings accounts like IRAs or 401(ks)s to help them retire.
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Natural disasters can also result in tax relief. The IRS announced dozens of tax relief announcements for individuals and businesses that were affected by natural disasters such as tornadoes, flooding, hurricanes, and straight-line winds. This relief is usually in the form of penalty and interest waivers, an extension of filing and payment, and deductions for theft and casualty losses resulting from federally declared disasters.
If you don"t file a timely claim to be reimbursed and the loss is reduced by the anticipated reimbursement, you can"t deduct casualty or theft losses.
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Tax deductions
Tax deductions reduce your taxable income and lower your tax bill. You can either take the standard deduction, or you can itemize your deductions on Schedule A Form 1040-SR.
Standard deduction
Your filing status, your age, and whether or not you are disabled, as well as the income tax return of another person, will determine how much standard deduction you can take. These are the standard deduction amounts applicable to the tax years 2021 and 2022:
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Standard Deductions 2021-2022 |
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|
Filing Status |
2021 Standard deduction |
2022 Standard deduction |
|
Single |
$12,550 |
$12,950 |
|
Filing Separately from Married |
$12,550 |
$12,950 |
|
Head of the Household |
$18,800 |
$19,400 |
|
Filing jointly by a married couple |
$25,100 |
$25,900 |
|
Surviving with Spouses |
$25,100 |
$25,900 |
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If you turn 65 years old or are legally blind, you can claim an additional deduction. This "additional standard deduction" for 2021 is $1,350 (or 1,700 if you file as a single or head-of-household) if your age is 65 or older, or blind. If you"re 65 years old or blind, the amount will double. The standard deduction for 2022 is $1,400 ($1,750 for a head of household or single). 7
You can be claimed as a dependent by another taxpayer if you earn more than $1,100. The standard deduction for 2021 can only be increased to $350 if your earned income exceeds $350. The deduction for 2022 is limited to $1,150, your earned income plus $400,
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Itemized deductions
Itemized deductions are expenses you can subtract from your adjusted gross to lower your tax bill and taxable income. Only if you do not claim the standard deduction, can you itemize your deductions? If the amount you are allowed to deduct exceeds the standard deduction, it is financially sensible to itemize. These are the most common itemized deductions:
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- Mortgage interest and discount points for the first $750,000 in secured mortgage debt. If you purchased the house before Dec. 16, 2017, the $1 million will be deducted.
- Charitable donations
- Unreimbursed dental and medical expenses
- State and local taxes (SALT).
- Certain gambling losses
- Investment interest expenses
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Tax relief is often targeted at specific taxpayers such as taxpayers who are facing unexpected costs from a hurricane or wildfire.
Tax Credits
Another form of tax relief is the tax credit. Tax deductions lower your taxable income but tax credits directly reduce the tax you owe.
Let"s take an example. Let"s say a taxpayer takes the standard deduction and pays $3,000. The person would also be eligible for a $1,000 tax credit. Their final tax bill would then be $2,000. A $1,000 tax deduction would net a $220 savings for someone in the 22% tax bracket.
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Tax credits are better than tax deductions because they lower the amount of tax that you owe and not only your taxable income.
This tax relief is sometimes called a tax incentive, as it reimburses taxpayers for any expenditures that the government considers worthwhile. The American opportunity tax credit program and the lifetime credit programs offer tax credits for people who enroll in postsecondary education programs. Some other tax credits that are popular include:
- Earned Income Tax Credit (EITC).
- Credit for child tax
- Tax credit for savers
- Premium tax credit for Health Insurance Marketplace
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