What Are Tax Breaks?

what are tax breaks

A tax break means the government is offering you a reduction in your taxes.

When the government offers you a tax break, it means you’re getting a reduction in your taxes. A tax break can come in a variety of forms, such as claiming deductions or excluding income from your tax return. In some situations, a tax break may not even require any action on your part at all if it relates to a reduction in the overall income tax rates or an increase in the value of the exemptions you claim.

Who creates tax breaks?

Behind every tax break is a tax law that the government passes which explains how the tax break works. When it comes to your federal income tax, all changes in tax law must be approved by the U.S. Congress and the President.

For example, when you fill out your tax return this year you may encounter a new tax credit that allows you to reduce your tax bill for the year. This new tax credit is a tax break that the federal government has approved. The motivation for issuing tax breaks is commonly to stimulate the economy by increasing the amount of money taxpayers have to spend or to promote certain types of behaviors such as purchasing energy-efficient appliances or attending college.

Tax deductions as tax breaks

You are probably familiar with the most common types of tax breaks – you get them every year when you claim deductions to reduce your taxable income on your tax return. Governments have no obligation to offer you deductions, but when they do, it is a tax break.

For example, the federal government has

a longstanding practice of allowing you to claim a wide range of itemized deductions, which effectively provide more tax savings than the standard deduction. This by itself is a tax break.

However, the government sometimes amends the requirements and limitations for claiming deductions. For example, during the 2010 tax year, Congress eliminated the adjusted gross income limitation on itemized deductions, whereas, in prior tax years, you have to reduce your itemized deductions when your income is too high.

Income exclusions are tax breaks

The best tax break of all is being able to entirely eliminate certain types of income from your tax return. Generally, these types of tax breaks apply to specific taxpayers.

One example is your ability to exclude most, if not all, of your Social Security income from income taxation during your retirement years. Another significant exclusion applies only to taxpayers who live and work abroad. Generally, these expatriates can eliminate a portion of their foreign earnings from U.S. taxation. In 2014, this exclusion amount applies to your first $99,200 of earnings.

Tax breaks for having dependents

When preparing your return, one of the first tax breaks you claim is likely to be the exemptions for your dependents. These exemptions work just like deductions in reducing your taxable income, but the amount is fixed by the government each year.

Like all other tax breaks, just because dependents exemptions are available each year doesn’t mean that it’s permanent. Congress can decide tomorrow to fundamentally change the way it collects income tax and can eliminate all dependent exemptions entirely.

TurboTax Deluxe searches more than 350 tax deductions and credits so you get your maximum refund, guaranteed.

Source: turbotax.intuit.com

Category: Taxes

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