Tax Break
Candlefocus EditorA tax break, also known as a tax deduction or tax credit, is a legally authorized reduction in the amount of taxes that an individual or business is liable to pay. Tax breaks are most often used as incentives to stimulate the economy or promote specific policy goals. Tax laws often offer tax incentives to encourage specific economic activity, such as pursuing higher education.
Tax credits reduce a taxpayer’s total tax liability on a dollar-for-dollar basis, meaning a taxpayer can use the credit to completely offset their tax liability. Refundable tax credits can even reduce a taxpayer’s liability below $0, resulting in a refund.
In contrast, a tax deduction reduces the gross income that is subject to taxes, thus reducing the total amount of taxes payable. Most tax deductions are based on a percentage of the amount spent on a qualified tax expense. For example, the allowable tax deduction for certain college tuition expenses is typically equal to a percentage of the amount paid.
Individuals and businesses may qualify for different types of tax breaks. Common tax breaks are deductions for charitable donations, itemized deduction for medical expenses or dependents, or credits for parents with children enrolled in higher education. Many credits and deductions are laid out in the Internal Revenue Service’s (IRS) tax code.
It is important to note that tax breaks are usually only beneficial if you owe taxes. If you are in a low-income bracket and do not owe taxes, a tax break may not result in any savings.
Tax breaks can have a significant impact when filing taxes, resulting in significant savings. It is important to review the various tax breaks available to ensure you are taking advantage of all the tax saving opportunities that may apply to you.