Tax Relief: What It Is and How It Works

Tax relief refers to government policies and programs that reduce tax burdens or help resolve tax-related debts for individuals and businesses. Relief can take the form of deductions, credits, exclusions, targeted incentives, or collection-relief programs.

How governments provide tax relief

• Policy incentives that change the tax code (for example, encouraging retirement savings through IRAs and 401(k)s).
• Targeted credits or exclusions for specific groups (e.g., low-income workers or families with children).
• Disaster-related relief after federally declared disasters, such as filing/payment extensions, penalty and interest waivers, and deductions for casualty and theft losses.

Tax deductions

Deductions reduce taxable income, which in turn lowers the tax owed.

Standard deduction

• A flat deduction based on filing status, age, and disability status.
• Amounts are adjusted annually for inflation and depend on filing status; additional amounts apply for those age 65 or older or legally blind. (For example, in 2024 an additional standard deduction of $1,950 applies for single filers or heads of household who are age 65+ or blind.)
• Taxpayers choose the standard deduction or may itemize if itemized deductions exceed the standard amount.

Itemized deductions

Common itemized deductions include:
– Mortgage interest and discount points on qualified mortgage debt (subject to limits)
– Charitable donations
– Unreimbursed medical and dental expenses (subject to threshold rules)
– State and local taxes (SALT), within applicable caps
– Certain gambling losses
– Investment interest expenses

Other notable deductions

• Student loan interest: up to $2,500 of qualifying interest paid may be deductible (subject to income limits).
• Educator expenses: up to $250 of unreimbursed classroom expenses for eligible educators.
• Health Savings Account (HSA) contributions: tax-deductible contributions for individuals with qualifying high-deductible health plans.

Tax credits

Tax credits reduce tax liability dollar-for-dollar and often provide larger tax savings than equivalent deductions. Some credits are refundable (can generate a refund if they exceed tax owed); others are nonrefundable.

Common credits:
– Earned Income Tax Credit (EITC)
– Child Tax Credit (CTC)
– American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC) for education expenses
– Saver’s credit for retirement contributions
– Premium Tax Credit for Health Insurance Marketplace coverage

Example: a $1,000 tax credit reduces a $3,000 tax bill to $2,000. By contrast, a $1,000 deduction reduces taxable income; at a 24% marginal rate it lowers tax by $240.

Tax exclusions

Exclusions remove certain types of income from taxable income. Examples:
– Employer-sponsored health insurance premiums (generally excluded from federal income and payroll taxes)
– Municipal bond interest
– Life insurance death benefits and child support payments
– Gain from sale of a primary residence: up to $250,000 excluded for single filers ($500,000 for married filing jointly), when conditions are met
– Foreign earned income and foreign housing exclusions for qualifying taxpayers living and working abroad

Disaster-related tax relief

Following federally declared disasters, relief typically includes:
– Filing and payment deadline extensions
– Penalty and interest waived for disaster-related delays
– Deductions for casualty and theft losses related to the disaster

Debt relief and IRS collection options

The IRS offers programs to help taxpayers address unpaid tax liabilities and avoid enforced collection actions:
– Offer in Compromise: settle tax debt for less than the full amount, when eligible
– Currently Not Collectible (CNC): temporarily halt collection when payment would cause financial hardship
– Installment agreements: pay a tax balance over time through monthly payments (interest and penalties may continue to accrue)
– Penalty abatement: reduction or removal of penalties for reasonable causes (e.g., natural disasters, serious illness, inability to obtain records)

Quick answers

• Difference between a tax credit and a deduction: credits reduce tax owed directly; deductions reduce taxable income.
• Adoption credit: maximum qualified adoption expense credit amounts are adjusted periodically (example figures: $16,810 for 2024 and $17,280 for 2025).
• Annual gift exclusion: $18,000 per recipient for 2024, increasing to $19,000 in 2025.

Bottom line

Tax relief takes many forms—deductions, credits, exclusions, and collection relief—to reduce tax burdens or help taxpayers manage liabilities. The best relief strategy depends on an individual’s or business’s circumstances, including filing status, income level, eligible expenses, and whether they face collection issues. Consult a tax professional or the IRS for guidance specific to your situation.