With the start of the new year, many taxpayers are looking for ways to reduce their tax burden and take advantage of any available tax relief. For those who qualify, one potential avenue for reducing their tax liability is through tax relief programs.
Offered by the federal government and some states, tax relief programs can provide a range of benefits, from tax credits to reduced penalties.
Read on to learn more about the types of tax relief available — and how they can benefit you during tax season.
What is tax relief?
Tax relief broadly refers to a number of government initiatives that reduce an individual’s tax burden in a given fiscal year. Your tax burden — sometimes also called your tax liability or tax bill — is what you owe in taxes, calculated based on your total income for the year.
For example, in the 2023 tax brackets, the first $11,000 of an individual’s income is taxed at 10%. So if you made $11,000 for the 2023 tax year, you would owe $1,100 in taxes.
Any income over $11,000 up to $44,725 is taxed at 12%. So if you make $15,000, you still owe the $1,100 from the first example, but you also owe 12% of the remaining $4,000, which is $480.
|10% of $11,000
|10% of $11,000 + 12% of $4,000
|Estimated tax bill
Tax relief — in the form of tax deductions, tax credits or exemptions — lowers your tax bill by either telling the IRS to ignore parts of your income (deductions and exemptions) or directly reducing the amount of taxes you owe (tax credits).
The term “tax relief” can also be used to refer to tax debt relief, which involves IRS programs that help Americans pay off tax debt, often settling it for a lower amount than is owed.
How does tax relief work?
The main function of tax relief is to reduce or eliminate your tax bill before you file with the IRS or state tax agency. This is accomplished in a number of ways, depending on the type of tax relief option that is used:
- Tax deductions. These reduce your taxable income, which lowers your final tax bill.
- Tax credits. These directly lower your tax bill by a set amount and can sometimes result in a tax refund if your bill is lower than the credit amount.
- Tax exemptions. These are not counted as part of your taxable income, which prevents your tax bill from going up. Some exempted income may not be reported on your tax return and some of it can be deducted during the filing process (like a tax deduction).
- Tax debt relief. These are IRS and state (or local) programs that help taxpayers who are behind on their taxes pay down their debt in a manageable way and potentially avoid severe penalties. Unlike the previous alternatives, this usually comes into play after the tax filing deadline has passed.
Tax software can help you identify which tax benefits you can take advantage of when filing your taxes.
Types of tax relief
As mentioned above, there are several government-sponsored programs and incentives that fall under the umbrella of “tax relief”:
Deductions reduce your total taxable income for the year, lowering your final tax bill. Taxpayers can generally claim deductions one of two ways: by taking the standard deduction allowed according to your filing status — among other criteria — or by making itemized deductions on Schedule A of your Form 1040 or 1040-SR.
Standard tax deductions
The standard deduction you can take depends on a number of factors, namely, your filing status, age and whether you’re disabled.
For reference, these are the standard deductions for 2022 and 2023:
|2022 Standard Deduction
|2023 Standard Deduction
|Married filing separately
|Head of Household
|Married filing jointly
These amounts can go up if you’re 65 years of age or older or if you are legally blind by the end of the tax year.
The additional standard deduction allowed in 2022 was $1,400 if you’re either over 65 or blind ($1,750 if you filed as single or head of household) and $1,500 ($1,850 if single or head of household) for the 2023 tax year. If you are both over 65 and legally blind, the additional deduction amounts double ($2,800 to $3,500 for 2022 and $3,000 to $3,700 for 2023).
Keep in mind that if you’re claimed as a dependent on someone else’s tax return, the standard deductions work a little differently for you. In 2022, standard deductions for dependents were set at $1,150 or your total earned income plus $400, whichever was greater.
The 2023 standard deductions for dependents are currently set at $1,250 or your earned income plus $400, whichever is higher. You should know that the standard deduction of “earned income plus $400” cannot exceed the limit for your filing status ($12,950 in 2022 if you’re filing as single, for example).
Itemized tax deductions
The vast majority of taxpayers take the standard deduction, which lowers your taxable income by a preset amount. But for some, itemized deductions can decrease your taxable income to a much larger degree — potentially even putting you in a lower tax bracket for the year.
A common example of itemized deductions are charitable donations to nonprofit organizations and business expenses incurred by self-employed individuals. Those who work for an employer may also deduct certain business expenses depending on the nature of their work.
In certain cases, your state and local taxes (SALT) can also be used as tax deductions. Some examples of these deductions are sales tax or income tax you’ve paid throughout the year, as well as real estate and property taxes for homeowners. SALT deductions are limited to $5,000 for individual filers and $10,000 for married couples filing jointly.
Although itemized deductions can be more beneficial than the standard deduction, you can only choose one of the two in a given tax year. This means that you should only opt to itemize deductions if the total amount you’ll be deducting is greater than the standard deduction for the year.
Other common itemized deductions include:
- Charitable contributions
- State and Local Taxes (SALT)
- Mortgage interest on the first $750,000 of secured mortgage debt (includes discount points)
- Unreimbursed medical and dental expenses
- Student loan interest
- Certain gambling losses
Unlike tax deductions, which lower your taxable income, tax credits directly reduce your overall tax liability. To put it plainly, deductions lower the amount that gets used to calculate your tax bill, while credits lower the amount of taxes you owe.
Benefits such as the child tax credit and earned income tax credit are two examples of government initiatives that can reduce taxpayers’ total tax burden. So is the Recovery Rebate Credit, which may be claimed by individuals who didn’t receive the full amount of (or didn’t claim) the Economic Impact Payments (aka stimulus checks) issued throughout the coronavirus pandemic.
Here are some of the more common tax credits that taxpayers can take advantage of:
- Child and dependent care credit
- Earned income tax credit (EITC)
- Residential energy efficient property credit
Tax exemptions, also called tax exclusions, are forms of income that are considered non-taxable and lower your overall taxable income (which also leads to a decreased tax bill). Child support payments, health insurance premiums paid by your employer and life insurance payouts are generally considered tax-exempt.
One notable tax exemption is the “gift tax exclusion,” which allows you to give money or property to friends or family members without having to pay taxes on it. For the 2022 tax year, you can gift up to $16,000 per recipient without getting taxed by the IRS.
The IRS website provides information on all possible exemptions for both individuals and businesses, but the information is scattered across several pages. Here is a short list of some exemptions:
- Received child support payments
- Premiums for employer-sponsored health insurance
- Life insurance death benefit payouts
- Combat service tax exclusion
- Foreign earned income exclusion
- Capital gains from a house sale (up to $250,000)
Tax debt relief programs
The IRS offers several options for individuals who owe back taxes to pay down their tax debt in ways that don't involve a huge lump sum payment, which can be difficult to afford all at once. These tax debt relief options vary, ranging from payment plans to penalty forgiveness and even a pause on collections.
Although the IRS only has jurisdiction over federal taxes, many state and local governments offer similar programs to the following IRS options:
- Offers in compromise (OIC). An OIC is a way to settle your tax debt for less than the full amount you owe. The IRS looks at your ability to pay, income, expenses and asset equity to determine your eligibility. Since this allows you to pay less than what you owe, this is one of the least commonly offered tax debt relief options.
- Innocent spouse relief. If your current or former spouse makes an error while filing taxes, you may be eligible for innocent spouse relief. This tax debt relief option exempts you from penalties that get applied as a result of your spouse’s filing errors. However, the IRS will only consider this option if the agency determines that you had no reasonable way of knowing about the errors.
- Installment agreement. These are payment plans that allow you to spread out your tax payments if you can’t pay your full tax bill in a single lump sum. There are no special requirements to apply for this tax debt relief option, but you can only apply online for amounts up to $50,000 (for long-term agreements) or $100,000 (for short-term agreements).
- Penalty abatement. Also known as “first-time penalty abatement,” this is typically used to forgive minor tax penalties such as missing a filing deadline or failing to pay a single tax bill. You need to be penalty-free for three years and have filed or requested an extension on your current taxes to apply for penalty abatement.
- Currently not collectible (CNC) status. CNC status means that the IRS has determined that you can’t pay the taxes you owe and will not attempt to collect them until you are reasonably able to do so. If you’re granted CNC status, the IRS reviews your finances every year until you’re able to pay back your debt.
Fresh Start program
The IRS’s Fresh Start initiative was created in 2011 (and later expanded) to help make the IRS’s tax debt relief options more accessible. It’s accomplished this largely through a combination of changes to the U.S. tax code and lowering qualification requirements for tax debt relief programs.
As an example, to determine eligibility for an Offer in Compromise, the IRS now looks at the following information:
- One year of future income for offers paid in five or fewer months (down from four years of future income)
- Two years of future income for offers paid in six to 24 months (down from five years of future income)
Keep in mind that all OICs must be paid within 24 months of the date the offer is accepted.
Because the guidelines for the Fresh Start program are so extensive, it can be hard for the average taxpayer to navigate them. Many people hire tax relief companies such as Anthem Tax Services to sort through their paperwork and determine if they qualify for any particular tax debt relief options.
If you have a complicated tax debt situation and need professional assistance, read through our article on the best tax relief companies to find the perfect fit for your needs.
Other tax debt relief services
Tax attorneys specialize in navigating complex tax code and tax law issues on behalf of their clients. One way they do this is by tackling tax issues across multiple states — when one owns several businesses, for example — and avoiding (or resolving) tax penalties that could result in criminal charges. Tax attorneys can also help clients file their taxes.
Tax relief companies
Tax relief companies employ a number of tax professionals (accountants, attorneys, IRS-certified agents, etc.) who can help identify the best tax debt relief solution for you.
Although you can negotiate with the IRS yourself, these companies use their combined years of tax experience to help you navigate complicated tax debt situations. If your tax debt is relatively straightforward, you’re better off reaching out to the IRS directly to save yourself hundreds or even thousands of dollars in unnecessary services.
What Is Tax Relief FAQs
What is the standard deduction for 2023?
What is the difference between a tax credit and a tax exemption?
What is the federal gift tax exclusion for 2023?
What tax credits are available for 2023?
Summary of Money’s Guide to Tax Relief
Tax relief is a broad term referring to any number of government programs and initiatives that help taxpayers lower or eliminate their tax bills.
The child tax credit, itemized deductions on your tax return and payment plans for back taxes are all forms of tax relief.
Tax preparation software or a good accountant can help you identify which tax credits, deductions and exemptions you can take advantage of when filing your taxes. However, if you feel like reading up on it yourself, irs.gov offers an Interactive Tax Assistant tool that can answer questions on hundreds of specific tax topics.