what is a tax benefit 
the term tax benefit refers to any tax law that helps you reduce your tax liability benefits range from deductions and tax credits to exclusions and exemptions they cover various areas including programs for families education employees and natural disasters some tax benefits are related to the ability to pay taxes for example the child tax credit and the earned income tax credit eitc recognize the cost of raising a family other tax benefits including mortgage interest and charitable donation deductions are incentives designed to further social policy goals understanding tax benefitstax benefits help individuals and corporations reduce their overall tax bills these benefits are a significant part of the tax regulations and legislation set by local state and federal governments tax benefits such as deductions credits exemptions and exclusions reduce the amount you owe annually to federal and state governments 1on the other hand tax shelters help lower taxes through particular investments these are legal vehicles that provide favorable tax treatment common examples of tax shelters include municipal bonds and employer sponsored 401 k plans 23you must be eligible for tax benefits to claim them for instance to qualify for head of household status you must be unmarried have a qualifying dependent who lives with you and pay more than half of the household expenses for the year 4tax benefits for educational expenses can only be claimed by those who spend money on tuition and other related costs during the tax year 5it makes financial sense to learn about any tax benefits you might be eligible for without the proper knowledge you could end up paying more in taxes than you owe it can be helpful to consult a tax professional such as an accountant to maximize your tax savings types of tax benefitsas noted above tax benefits come in all shapes and sizes we ve highlighted some of the more common ones below a tax deduction reduces your taxable income when you file your annual income tax return you have the option to take the standard deduction or to itemize your deductions itemizing your deductions makes sense if the sum of your qualified expenses is greater than your standard deduction for example if a single taxpayer s itemized expenses total 15 000 they would likely itemize rather than take the 13 850 standard deduction however if the same filer s qualified expenses total just 8 000 they would save money by taking the standard deduction even if you don t itemize you can take certain above the line deductions along with the standard deduction these include deductions for student loan interest traditional individual retirement account ira contributions contributions to health savings accounts and more all these deductions lower taxes by reducing taxable income and possibly lowering your tax bracket say for example that a single filer has 49 000 of taxable income for the 2024 tax year landing them in the 22 marginal tax bracket therefore they would pay 22 on any income over 47 150 the beginning of the 22 tax bracket 6however if they qualify for 2 000 in above the line tax deductions they will be taxed on 49 000 2 000 47 000 giving them a marginal tax rate of 12 for tax year 2024 6tax deductions often reduce the total amount of income earned by businesses most companies use a standard income statement to calculate their taxable obligations with taxation falling on the last line tax credits also save you money but they work differently than deductions a tax credit is applied to the amount of tax you owe after all tax calculations are made for example if you owe 3 000 after taking deductions and calculating taxes with your marginal tax rate a 1 000 credit would reduce your tax bill to 2 000 there are many types of tax credits available for individuals and businesses for individuals some of the most common tax credits include the child tax credit the eitc and the premium tax credit 91011refundable tax credittax credits are either refundable or non refundable a refundable tax credit results in a refund check if the tax credit exceeds your tax bill for example say you apply a 3 400 tax credit to your 3 000 tax bill your bill would be reduced to zero and you would receive the remaining portion of the credit as a refund in this case that refund would be 400 non refundable tax credita non refundable tax credit does not result in a refund because it only reduces the tax owed to zero using the example above if the 3 400 tax credit were non refundable you would owe nothing to the government but would forfeit the 400 that remains after the credit is applied some examples of non refundable tax credits include the saver s credit adoption credit child care credit and mortgage interest tax credits tax credits do not impact your taxable income or marginal tax bracket they are subtracted from your tax bill to directly reduce the amount of tax you owe 12the tax cuts and jobs act tcja suspended the personal tax exemption for 2018 through 2025 but some tax exclusions still apply 13tax exclusions usually arise in pretax payments that help you lower your taxable bottom line income excluded for tax purposes usually does not show up on your tax return at all 14one of the most common exclusions is the employer based health insurance payment program if an employer takes healthcare payments on a pretax basis an employee s taxable income is lowered at the end of the pay period which reduces the amount of tax owed 15the annual gift tax exclusion is 17 000 for 2023 and increases to 18 000 for 2024 you can gift up to that amount tax free to as many people as you wish without using up any of your lifetime gift and estate tax exemption 616a tax shelter provides a variety of tax advantages it is generally a vehicle with lower or no tax requirements if you abide by the contracted terms one of the most popular tax shelters is the 401 k that s because income is sheltered from a higher tax rate during investors higher earning years compared to in retirement when their income and tax rate is lower tax havens can also be a type of tax shelter these are often used by businesses companies may incorporate in certain regions to lower their business tax bill some of the most popular tax havens include bermuda the bahamas and the cayman islands 17not all tax shelters are legal and legitimate the irs treats illegal tax shelters as fraudulent activities taxpayers who use illegal tax schemes may face penalties criminal prosecution and prison time 18certain investment products may offer a tax shelter or tax exemption in and of themselves municipal bonds for example are exempt from federal and state taxes if aligned with the state in which the bondholder lives 19other tax advantaged investments include tax free savings accounts municipal mutual funds or exchange traded funds etfs and some life insurance policies 