Well, let’s just start by saying that taxes are just as inevitable as they are unwanted. However, you can reduce the amount of tax that you pay. One of the surest ways to reduce the amount that you have to pay is to deposit to the Internal Revenue Service and avail tax relief benefits.

These benefits help you lower your taxable income and ensure that the amount of tax is reduced. But, what exactly does tax relief mean?

 

Tax relief defined

Tax relief can be referred to as any incentive or program, which reduces the amount of tax that you owe to any business entity or an individual. Some prominent examples of tax reliefs are temporary incentives like the tax credit that you get when you purchase a brand-new high-power cooling or heating equipment, or the allowed deductions toward pension contributions.

 

What does a tax relief do?  

As is clear from the name, the primary reason people seek tax relief is to lower their tax liability. Many times, a tax relief could also be targeted toward providing aid for a particular cause or an event. For instance, when a hurricane hits an area, the government might provide tax relief to the area. Sometimes, tax reliefs are also made available to promote environmental causes. For instance, you get tax credits for the installation of solar panels or the energy-conserving windows. If you purchase a piece of equipment or an appliance, which is energy efficient, you’ll be eligible for a tax credit.  

A business entity or an individual might get tax relief by way of tax forgiveness, tax deductions, tax credit, and tax exclusions. Now, let us understand all of these four types of tax reliefs. 

 

Tax deductions

With a tax deduction, your taxable income is reduced. Let’s understand this with an example. 

There is a taxpayer who has an income of $75,000 a year. Of this income, he owes $12,364 to the federal income tax. However, on this income, they have qualified for a deduction of $8,000, then their taxable income will only be $67,000, which is the total income after the deduction. As a result, the tax would come down to $10,604. This reduction amount is the taxpayer’s tax relief. Because of this relief, the amount that the taxpayer gives the government comes down.   

As a taxpayer, when you file for income tax, you will be entitled to 2 options in deductions. 

  • Standardized deduction
  • Itemized deduction

Every taxpayer can opt for either of the two options. For instance, if you opt for the standardized deduction, the itemized deduction will not be available for you and vice versa. Thus, choosing the type of deduction is crucial. You need to take your time and analyze which of the two would bring you maximum benefit.

Let’s understand both of these deductions, one by one. 

  • Standardized deductions
    If you opt for the standardized deduction, you’ll get a single amount deduction. This amount would be reduced from the total gross income. After the reduction, you’ll get your net income, and this is the income that you’ll use for determining the bracket of the tax that you fall in, and the amount of tax that you have to pay accordingly. 
    It is the individual’s filing status, which determines the standardized deduction amount. In the financial year 2019, individuals were eligible for a standardized deduction of $12,200. It was increased by $200 from last year.  
  • Itemized deductions
    Those tax deductions that can be taken in exchange for your standardized deductions are known as the itemized deduction. Some of the items, which are included in the itemized deductions, are: 
  • Medical expenses
  • Taxes on property
  • Interest on mortgage
  • Charitable donations

Though opting for standardized deductions is fairly easy, it has been noted that the individuals who opt for itemized deductions save more. However, there’ll be times when you might not be eligible for filing for the standardized deduction. It might happen if both you and your partner are separately filing, and your partner is availing itemized deductions. If that’s the case, you, too, will have to opt for itemized deductions. 

To decide whether you should opt for standardized deductions or itemized deductions, you’ll have to do some calculations. So, for this, you need to add up all the itemized deductions. In case these deductions account for an amount higher than the standardized deduction amount, you should opt for itemized deductions. It will consequently help you save some of the money that you would have paid toward taxes. In case the amount of itemized deduction is not higher than that of standardized deductions, it is best to opt for the standardized deductions. 

For itemized deductions, you’ll have to use Form 140 Schedule A.  

 

What all is included in itemized deductions?
Following the IRS, there is a multitude of things that are eligible for itemized deductions. Of course, you can't be aware of all the available itemized deductions. Thus, when opting for this, you could seek help from a tax professional. In case that’s not what you prefer, you can even use software that can help you with tax preparation. Nonetheless, here we have listed some of the common itemized deductions that you can avail of. 

 

  • Dental or medical expenses
    Itemized deductions are available for you and your family’s dental care and medical expenses. With this deduction, you can reduce the expense amount higher than 7.5% of the adjusted gross total income. 
  • Charitable contribution
    If you made a charity to any qualifying organization in the financial year, you can add the total and itemize. It will help you reduce your total tax payments. As part of charitable contribution, you are also eligible to deduct the current market value of all the items given as a donation to a charity. Thus, it is recommended for you to maintain a thorough book record of all the contributions that you made. The record can be maintained by taking a receipt or a bank record from the charity where the donation has been made.  
  • Personal loss during a causality
    If you become a disaster victim (herein, disaster must be the which is declared by the country’s current President), you will qualify for an itemized tax deduction. In this deduction, you can include items that you lost, such as your vehicles, home, or household items, which aren’t covered by insurance in the tax return.  
  • Mortgage points
    On your home mortgage, you’ll pay a prepaid interest. This accounts for your mortgage points. You can deduct these points as the mortgage interest if you opt for the itemized deductions method. In addition to the mortgage interest, the mortgage insurance and the property tax are also included in the mortgage points. 
  • Home office cost
    If you opt for itemized deductions, you can deduct the home office cost if your workspace is in your house. There are multiple restrictions applicable to this, so please be careful.
  • Work-based education
    In case you take up any tuition, purchase supplies, use transportation, pay lab fees, buy books, or bear any travel cost for any type of work-based education, you can deduct this expense if you are opting for an itemized deduction. Furthermore, the research cost can also be deducted. You must ensure that you deduct the amount only if the particular cost has been used to accelerate or maintain your skills needed for the job or required by the employer.  
  • Other items
    Deductions can also be claimed for local income, state income, property taxes, and sales taxes paid in the year, equivalent to $10,000. Furthermore, if you are filing separately, despite being married, you can claim a deduction of up to $5,000.

 

Tax credit

A tax credit is the second type of tax relief, and, fortunately for you, it offers a higher amount of saving than a tax deduction. This happens because a tax credit brings in a direct reduction in the bill of a taxpayer. The reduction takes place dollar by dollar and not just reduces the taxable income, as is witnessed in tax deductions. So, in simpler terms, the tax credit is directly subtracted from the amount of tax that the taxpayer owes to the government after applying all the deductions from the taxable income. Let’s understand this with an example. 

For instance, if you owe your government a tax amount equivalent to $2,000, but you find out that you can avail of a tax credit of $1,000, you’ll only have to pay the government an amount of $1,000, as tax after the application of the tax relief.        

 

  • Tax credits types
    Tax credits can be of the following two types: 
  • Refundable  
    In this type of tax credit, you can avail of a refund, even if the amount of return is higher than the tax that you owe to the government. 
  • Non-refundable
    In this type of tax credit, you can avail of a refund only to the extent of the tax that you owe to the government. 

 

  • Tax credits that you can avail
    Many tax credits are available for taxpayers. It wouldn’t be possible for you to be aware of all the available tax credits. Thus, it is advisable to seek help from a tax professional. In case that’s not what you prefer, you can even use software that can help you with tax preparation.
    Here are some commonly available tax credits:
  • Dependent and family credits
  • Savings and income credits
  • Healthcare credits
  • Homeowner credits 
  • Education credits

 

Tax exclusion
If a particular income is excluded from tax, it means that there’s no tax applicable to it. Any income which is excluded from the taxable income is not included in the taxpayer tax return. In case this income does appear on the tax return, it will be shown in some other part of the return. At times a particular income is tax-excluded, as it is not possible to measure it. However, at other times, a particular income is tax-excluded to motivate the taxpayer to take up that tax-excluded activity. For example, if a worker gets any health insurance, which is either paid by the employer or is available for them as part of their job, then on such insurance coverage, tax relief is applicable. It is so because the taxpayer is not eligible to pay any tax on this health insurance policy, and the employer must have deducted this as an expense to their business.   

Emigrants who earn money in a foreign country are also eligible for a tax relief benefit equivalent to $105,900. 
For instance, if there’s an expat who makes $200,000 from a job in any foreign location, then of this income, the tax will need to be paid only on $94,100 (i.e., $200,000 - $105,900).  

 

Forgiveness of the tax debt 
Back in the year 2011, a new initiative known as Fresh Start was implemented by the IRS. As part of this initiative, newer options came in for the taxpayers to pay back their tax debt. Under this scheme, the taxpayer only had to pay a percentage of their original liability of tax. So, the IRS’ tax forgiveness was decided, and it was completely dependent on the individual’s financial situation. Thus, tax forgiveness relief was only an arrangement to recover the taxes (though reduced) from the taxpayers and motivate them to prevent tax lien.

Thus, one must be aware of all the applicable tax reliefs. The mere knowledge of it can help one save a lot of money.