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.

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 has historically made tax relief announcements 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.

Tax Deductions

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.) In addition, there are a number of tax deductions a taxpayer can take independent of the standard deduction or itemized deduction. Each type is discussed more below.

Standard Deduction

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 2023 and 2024 tax years.

Standard Deductions for 2023 and 2024
Filing Status	2023 Standard Deduction	2024 Standard Deduction
Single	$13,850	$14,600
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

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 2023, this "additional standard deduction" is $1,500 ($1,850 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 2024 is $1,550 ($1,950 if single or head of household).

If another taxpayer can claim you as a dependent, your standard deduction for tax year 2023 is limited to the greater of $1,250 or your earned income plus $400 (the total can't be more than the basic standard deduction for your filing status). For 2024, the standard deduction for a dependent increases to $1,300 or the individual's earned income plus $450.

Itemized Deductions

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
  

Other Deductions

Beyond the standard deduction and itemized deductions, there are other deductions taxpayers can take. For example, taxpayers who have paid interest on qualifying student loans may be able to deduct up to $2,500 from their taxable income. This deduction can be taken whether the taxpayer takes the standard deduction or itemized deduction.

Another deduction is the educator expense deduction designed to support teachers and eligible educators. This deduction allows educators to deduct up to $250 of unreimbursed expenses incurred for classroom supplies.

Last, the health savings account (HSA) deduction offers a tax advantage for individuals with a high-deductible health plan. Contributions made to an HSA are tax-deductible, reducing taxable income and providing a way for individuals to save for qualified medical expenses.

Tax Credits

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.

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

Tax Exclusions

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.

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.

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.