Posted by Thomas G Kinsella, ATP

Understanding Tax Reliefs and Its Many Forms

Understanding Tax Reliefs and Its Many Forms

Tax relief is any policy or program from the government to reduce the taxes paid by businesses and individuals. This relief might be universal, or it could target a specific group of taxpayers or help achieve a particular goal set forth by the government. 

Individual taxpayers do enjoy tax reliefs via a tax credit, deductions or exclusions, and at times, a tax lien forgiveness. One way to track the FG policy is via the changes and additions made to the federal tax loans over time. The US government encourages Americans to save for retirement by contributing to a retirement account, which is tax delayed. There are tax penalties from withdrawing from the account meant to discourage early withdrawals.

The tax code also applies to series of natural disasters, over the year. Victims of a hurricane might qualify for some tax relief to cushion the effect of damage to their property after POTUS declares a national disaster. For example, the 2018 wildfire people in California could declare casualty losses on their tax returns what their private insurance did not cover. 

The idea behind tax relief is to bring down the tax liability of taxpayers- businesses or individuals. Many times, it is meant to assist a set of people or to support a cause. 

Tax Deductions 

Tax deduction involves the use of legal deduction as a means to reduce taxable income. It is a form or a relief, with the most common one being the home mortgage interest. 

A tax relief, at times, is usually set for a group of taxpayers like victims of a natural disaster that have to bear unplanned repair costs. 

A tax deduction brings down the income of the taxpayer that can be taxed. For instance, for the 2020 tax year, let us assume that John, a single filer has his taxable income set at $75,000. John's federal income tax will be $12,500 if there is no deduction. However, if John qualifies for a tax deduction of $8,000, he will only have to pay taxes on ($75,000 - $8,000), which gives $67,000. This means John has a taxable income of $67,000, and he will only pay $10,500 as federal income tax. 

Tax Credits

Also, one of the forms of tax relief is tax credits, which give better saving compared to tax deductions. Unlike a tax deduction that reduces taxable income, a tax credit removes the individual's overall tax amount even after deductions.

For instance, after Madison has taken the standard deduction (or itemizing), the bill comes to $4,500. If Madison gets a tax credit of $1,500, her overall and final tax bill will come down to $3000.

This is a tax relief known as tax incentives, as the idea is to reimburse taxpayers for expenses that the government feels are necessary. A typical example is the Lifetime Learning Credit and the American Opportunity Tax Credit, which gives a tax credit for people who take post secondary education. 

Tax Exclusions 

Exclusions make some type of income tax-free, which eventually brings down the entire amount that the taxpayer can report as their gross income. 

There are cases in which income excluded for the purpose of taxes will not be revealed in the report. Also, there are other cases where one will record it in a section of the return and deduct it in another area. 

For instance, the value of the health insurance paid by the company will not be recorded on the tax return for individuals, which removes the burden of paying such income tax from the employee. The employer, however, can deduct such costs as their business expense. 

Tax Debt Forgiveness

Uncle Sam also has a program known as Fresh Start in which a taxpayer gets various options to take care of their past tax debts at a percentage for the original value. The IRS does this to help people avoid tax lien and come up with a way to take care of their debt over time.



Thomas G Kinsella, ATP
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