Tax Benefit: What is it?

Having to pay taxes is a fact of life and taxes are an important source of revenue for governments. But the good news is that the government offers certain tax benefits to encourage people and businesses to engage in activities that benefit society, or to help individuals and businesses save money or grow their assets.

Tax benefits can create significant savings for individuals and business taxpayers. They are generally offered in the form of deductions, credits, exclusions, and shelters.

Deductions, credits, and exclusions reduce the amount of taxable income you must report to the government, saving you money. Different deductions are available including standard deductions, itemized deductions, and above-the-line deductions (allowing for deductions for certain expenses that are taken before totals income is calculated).

A tax credit is an even bigger win for taxpayers. Tax credits generally reduce the amount of taxes owed, rather than just reducing the taxable income. Common federal tax credits include earned income credit, education credits, and child tax credits.

Exclusions from income are also available and these represent income that is not subject to tax. Common federal income exclusions are employer contributions to health, accident, and pension plans, and tax-exempt interest.

Lastly, tax shelters, like deferred retirement and profit-sharing plans, offer additional benefits, such as tax-sheltered investment opportunities. These measures, combined with other tax-advantaged savings accounts like IRAs and 401(K)s, can help reduce the overall income tax burden for citizens and businesses.

To take advantage of available tax benefits you must meet specific requirements and these often vary from one tax benefit to another. Requirement can include income limits, filing status, purpose of the benefit, and dependent status.

Tax benefits can be complex, as rules and regulations change frequently. Therefore, it is important to stay abreast of any tax benefits you may be eligible for to ensure that you don't miss out on tax savings. It is advisable to seek professional help when preparing tax returns so that you can maximize your tax-saving opportunities.