What is tax relief?
How it works and which types you can qualify for
Tax relief refers to government programs such as deductions, credits or exemptions designed to help taxpayers resolve their tax-debt burdens or reduce their tax bills. Tax relief can either lower your tax liability by directly reducing the taxes you owe Uncle Sam (tax credits) or asking the IRS to “exempt” some of your income to lower your taxable income.
The whole tax season revolves around how far you can lower your tax bill, and tax relief offers the perfect platform.
Key insights
- Programs through the IRS can help you clear your tax debt without straining your finances.
- Tax deductions allow you to deduct expenses (such as student loan interest), lowering your tax liability.
- If you qualify for tax credits, you get a direct reduction from the tax you owe.
How does tax relief work?
Tax relief programs and initiatives aim to alleviate taxpayers' tax burdens by offering deductions, credits and exclusions. Additionally, initiatives aid taxpayers in settling overdue tax debts, potentially preventing liens.
Government policy drives amendments to the federal tax code, often to address societal concerns such as insufficient retirement savings. For instance, incentives like individual retirement accounts (IRAs) and 401(k) plans encourage retirement savings.
Tax relief extends to those affected by natural disasters. The IRS announces relief measures for individuals and businesses hit by severe weather, wildfires or droughts, providing extensions, waivers and deductions for losses.
You can claim the deductions you qualify for when filing for your taxes. Read on for a deeper understanding of the tax relief programs.
Types of tax relief
Tax relief can help manage the financial burden when buying a home, paying student loans or saving for retirement. Here are a few examples:
Student loan debt
While the student loan payments aren’t deductible, the interest accrued on the balance is. The student loan interest deduction allows you to deduct the interest you paid (up to $2,500) during the year. You can only deduct student loan interest if your modified adjusted gross income (MAGI) is less than $85,000 ($175,000 if you file jointly).
For example, let's say you have a $29,000 student loan with a 5% annual interest rate. At the end of the standard 10-year repayment plan, you’d pay $308 (with $121 going toward loan interest). During the one-year repayment, you’d repay $3,691 ($2,393 in principal and $1,398 in interest). If you’re eligible for student loan interest relief, you can deduct the $1,398 from your taxable income.
Homeownership
As a new homeowner, you can take advantage of mortgage interest deduction to reduce your taxable income and lower your tax bill.
If you’re eligible for the mortgage interest deduction, you can deduct the interest of the mortgage payment you’ve paid during the year from your taxable income.
In addition, you can improve your home and enjoy some tax relief benefits. For example, the residential clean energy credit is 30% of the cost of your home's new and qualified energy property if you install it in 2024 through 2032.
"Right now, green energy tax credits are pretty hot. They can vary depending on where you live, but generally, you can score up to 30% back on solar purchases with the solar tax credit,” said Joe Camberato, a financial advisor and CEO of National Business Capital.
Retirement savings
Retirement savings are another great way to reduce your tax bill. You save for the future and minimize your tax liability. It's a win-win.
However, the type of retirement account you choose determines when you enjoy the tax deductions. For example, if you contribute to a 401(k), your contribution is deducted from your gross income, which lowers your tax liability by reducing your taxable income.
You also have the choice to open a Roth IRA, contribute after-tax dollars to your retirement fund, and enjoy tax-free withdrawals after the age of 59½ years.
Types of tax debt relief
If you have a tax debt that you can’t pay in full or partly, taking advantage of a tax debt relief program can help you avoid wage garnishments, tax liens and levies.
Here are four types of programs:
Offer in compromise (OIC)
This program allows you to pay less than you owe the government in taxes. Taxpayers are only eligible if they can’t afford to pay their tax debt with their current financial ability or if paying the tax debt in full would cause a financial strain.
Currently not collectible (CNC)
If your gross monthly income is too low to cover your tax debt without causing financial hardship, the IRS can pause your tax payments under this program.
You can defer payment until you’re back on your feet without facing penalties.
Penalty abatement
The IRS can lift your penalties if you have a good reason for not filing your taxes. Unfortunately, being low on funds doesn’t count in this case. Acceptable reasons include incapacitation, serious illness and natural disasters.
Innocent spouse relief
If your spouse — current or former — makes an error when filing taxes, the IRS might lift the penalties that the error may trigger. You’re only eligible if you can prove there was no way of knowing about the error.
Installment agreement
This program allows you to spread your tax payments if you can’t pay in full. The IRS might continue increasing the interest and penalty fee until you clear the balance.
For example, if you owe the government $50,000 or less in taxes, you can apply online and pay the amount monthly.
» MORE: How to file back taxes
FAQ
Are there specific tax relief options for student loan debt?
The student loan interest relief allows students to deduct up to $2,500 of the interest paid during the year.
How can I determine if I qualify for tax relief programs?
Review the official IRS site and stay current on the tax relief programs. In addition, consult with a professional to ensure you take advantage of all the deductions you’re eligible for.
What is the difference between a tax credit and a tax deduction?
A tax deduction reduces taxable income, lowering the amount subject to taxation. On the other hand, a tax credit directly decreases the tax liability, providing a dollar-for-dollar reduction in taxes owed.
Tax deductions lower the income on which taxes are calculated, while credits directly reduce the tax owed, offering more significant financial benefits.
Bottom line
The tax season is a stressful time, and no one looks forward to a tax bill. Familiarizing yourself with tax relief can help make the season bearable. You can reduce your taxable income and tax bill through relief programs by claiming your tax credit or reducing taxable income.
Article sources
- IRS, “Get help with tax debt.” Accessed Feb. 17, 2024.
- IRS, “Topic no. 456, Student loan interest deduction.” Accessed Feb. 17, 2024.
- IRS, “Publication 936 (2023), Home Mortgage Interest Deduction.” Accessed Feb. 17, 2024.
- IRS, “Types of Retirement Plans.” Accessed Feb. 17, 2024.
- IRS, “401(k) limit increases to $23,000 for 2024, IRA limit rises to $7,000.” Accessed Feb. 17, 2024.
