how tax breaks work
the government provides tax breaks to individual and corporate taxpayers greatly reducing their tax liabilities tax credits deductions exemptions and tax exclusions may enable these savings 2in some cases you don t have to take any action to get a tax break for example life insurance proceeds you receive are generally excluded from your taxable income and you don t have to report them 3 however to take advantage of most tax breaks you must claim them e g tax credits or deductions on your income tax return and meet specific eligibility requirements the personal exemption was a federal tax break up until 2017 under the tax cuts and jobs act the personal exemption deduction is suspended reduced to 0 for tax years 2018 through 2025 4tax breaks can stimulate the economy by increasing the amount taxpayers have to spend and boosting what businesses can invest in their growth moreover tax breaks can promote certain behaviors that benefit society such as replacing gas guzzling cars with modern fuel efficient vehicles as noted above tax breaks are implemented because of state and federal tax laws regulations outline how tax breaks work who qualifies and in some cases how long the tax break lasts the u s congress and the president are responsible for approving federal income tax laws for instance congress approved the tax cuts and jobs act tcja which made significant changes to the u s tax code and was signed into law in 2017 by then president donald trump 5charitable organizations and religious institutions are generally tax exempt this means they are not required to pay federal income taxes 67types of tax breaksa tax credit reduces your tax liability on a dollar for dollar basis this has a greater impact than a deduction which merely reduces the amount of income subject to taxes a tax credit is applied to the amount of tax you owe after all deductions are taken from your taxable income 2 for example if you owe 3 000 in taxes and are eligible for a 1 100 tax credit the amount you owe decreases to 1 900 3 000 1 100 after the tax break is applied tax credits lower your tax bill on a dollar for dollar basis on the other hand tax deductions reduce your taxable income or the amount of income on which your taxes are calculated 2 tax credits are worth more than deductions because they directly reduce your tax bill corporations can also take advantage of tax credits to lower their tax bills the government permits these to benefit workers and the national economy certain credits are implemented regardless of the industry or sector such as business tax credits investment credits and credits for child care for workers they can also be more industry specific such as those in the agricultural energy and mining sectors 8tax deductions are expenses that can be subtracted from your gross income to reduce your taxable income and therefore your tax bill 9 for example a 1 000 tax deduction would lower your taxable income by that same amount the value of the deduction depends on your tax bracket so if you are in the 22 tax bracket that 1 000 tax deduction would save you 220 1 000 22 on your tax bill most taxpayers have the option to take the standard deduction a fixed dollar amount based on your filing status or itemize their deductions on schedule a of form 1040 or 1040 sr here s a rundown of the standard deduction amounts for 2022 and 2023 1011deductions you can itemize include if the sum of the deductions you can itemize exceeds your standard deduction it makes financial sense to itemize a tax exclusion shelters a certain portion of income or type of income from taxation for example you can generally exclude child support payments life insurance proceeds and municipal bond income from your taxable income likewise health insurance premiums your employer pays are exempt from federal income and payroll taxes and the portion of premiums you pay is generally excluded from your taxable income 14another common tax exclusion pertains to home sales if you have a capital gain from selling your main home you can exclude up to 250 000 500 000 if married filing jointly of that gain from your income to qualify you must 15also if you earn income in a foreign country you may be eligible for a tax break through the foreign earned income exclusion the total for an individual is 112 000 for the 2022 tax year and 120 000 for the 2023 tax year 16