# Tax Relief: What It Is and How It Works

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> **Definition**
>
> Tax relief helps taxpayers reduce their tax bills through tax deductions, credits, and exclusions.

## What Is Tax Relief?

Tax relief is any government program or policy designed to help individuals and businesses reduce their tax burdens or resolve tax-related debts. It may be universal tax cuts, [targeted programs that benefit specific groups](https://www.investopedia.com/terms/c/catalog-of-federal-domestic-assistance-cfda.asp) of taxpayers, or initiatives like the Child Tax Credit (CTC) or the Earned Income Tax Credit (EITC).

### Key Takeaways

*   Tax relief can help individuals or businesses lower their tax bills or settle tax-related debts.
*   Tax deductions reduce taxable income.
*   [Tax credits](https://www.investopedia.com/overlooked-tax-credits-8786359) directly reduce a tax bill and may even provide a refund.

## Government Policies

Tax relief programs help taxpayers reduce their tax bills through tax deductions, credits, and exclusions. Other programs help taxpayers settle their tax-related debts.

Government policy goals may help revise the federal tax code. For example, in response to concerns about the general lack of retirement savings in the U.S., Congress created incentives to encourage savings in tax-advantaged accounts such as IRAs and 401(k)s.  

Tax relief is also available for those affected by [natural disasters](https://www.investopedia.com/financial-edge/0311/the-financial-effects-of-a-natural-disaster.aspx) like storms, tornados, flooding, hurricanes, straight-line winds, wildfires, and drought. The relief typically includes filing and payment extensions, penalty and interest waivers, and deductions for casualty and theft losses sustained due to federally declared disasters.  

> **Important**
>
> A tax deduction reduces taxable income for the year, thereby lowering a tax bill. Taxpayers can take the standard deduction or itemize their deductions on Schedule A of Form 1040 or 1040-SR.

## Standard Deduction

The standard deduction amount is based on filing status, age, and whether the taxpayer is disabled or claimed as a dependent on someone else's income tax return. The standard deduction amounts for the 2024 and 2025 tax years are:

Individuals age 65 or older or legally blind by the end of tax year 2024 are entitled to an additional standard deduction of $1,950 if single or head of household. For 2024, the standard deduction for a dependent claimed on another taxpayer's return is $1,300 or the individual's earned income plus $450.

## Itemized Deductions

Itemized deductions are expenses subtracted from adjusted gross income to lower income and tax bills. Individuals can itemize their deductions only if they don't claim the standard deduction. It makes financial sense to itemize if the total amount is greater than the standard deduction. Common itemized deductions include:

*   [Mortgage interest](https://www.investopedia.com/terms/home-mortgage-interest.asp) and discount points on the first $750,000 of secured mortgage debt
*   [Charitable donations](https://www.investopedia.com/articles/personal-finance/041315/tips-charitable-contributions-limits-and-taxes.asp)
*   Unreimbursed [medical and dental](https://www.investopedia.com/articles/personal-finance/081615/20-medical-expenses-you-didnt-know-you-could-deduct.asp) expenses
*   [State and local taxes (SALT)](https://www.investopedia.com/salt-5180146)
*   Certain gambling losses
*   [Investment interest expenses](https://www.investopedia.com/terms/i/investment-interest-expense.asp)  
    

## Other Deductions

*   **Student Loans:** Taxpayers who have paid interest on qualifying student loans may be able to deduct up to $2,500 from their taxable income. This deduction can be taken whether the taxpayer takes the standard deduction or itemized deduction.
*   **Educator Expenses:** This deduction allows educators to deduct up to $250 of unreimbursed expenses incurred for classroom supplies.
*   **Health Savings Account (HSA):** A tax advantage for individuals with a high-deductible health plan. Contributions to an HSA are tax-deductible, reducing taxable income and providing individuals with savings for qualified medical expenses.

## Tax Credits

Unlike tax deductions, which lower taxable income, [tax credits](https://www.investopedia.com/financial-edge/0312/tax-credits-that-can-get-you-a-refund.aspx) directly reduce the tax individuals owe. Suppose a taxpayer takes the standard deduction and their tax bill amounts to $3,000. If the person is also eligible for a $1,000 tax credit, their final tax bill would be $2,000.

This type of tax relief is often described as a tax incentive because it reimburses taxpayers for expenditures the government deems worthwhile. For example, the [American Opportunity Tax Credit (AOTC)](https://www.investopedia.com/terms/a/american-opportunity-tax-credit.asp) and the Lifetime Learning Credit [(LLC)](https://www.investopedia.com/terms/l/lifelearningcredit.asp) programs give tax credits to people who enroll in post-secondary education programs. Other popular tax credits include:

*   [Earned income tax credit (EITC)](https://www.investopedia.com/terms/e/earnedincomecredit.asp)
*   [Child Tax Credit (CTC)](https://www.investopedia.com/terms/c/childtaxcredit.asp)
*   [Saver's tax credit](https://www.investopedia.com/terms/s/saverstaxcredit.asp)
*   Health Insurance Marketplace [premium tax credit](https://www.investopedia.com/premium-tax-credit-2021-definition-5115090)

## Tax Exclusions

Tax exclusions set aside certain types of income as non-taxable and reduce taxable income. For example, taxpayers can exclude child support payments, life insurance death benefits, and municipal bond income.

A common tax exclusion is employer-sponsored health insurance. Health insurance premiums are exempt from federal income and payroll taxes, and the portion of premiums paid is generally excluded from an individual's taxable income.

Those with a [capital gain](https://www.investopedia.com/taxes/capital-gains-tax-101/) from the sale of a primary residence home can [exclude up to $250,000](https://www.investopedia.com/ask/answers/06/capitalgainhomesale.asp) ($500,000 if married and filing jointly) of that gain from their income.

> **Tip**
>
> If taxpayers earn income overseas, they might be eligible for the foreign-earned income exclusion and the foreign housing exclusion.

## Debt Relief

The IRS [Fresh Start](https://www.investopedia.com/articles/taxes/12/start-over-with-irs.asp) program helps taxpayers catch up on back taxes and avoid tax liens, levies, wage garnishments, and jail time. The program streamlines the tax collection process. Individuals and businesses are eligible for the program which offers several options:

*   **Offer in compromise:** This federal program helps settle IRS tax debt for less than the full amount owed.
*   **Currently Not Collectible (CNC):** Under the CNC program, the IRS determines that gross monthly income is too low to reasonably pay what is owed without triggering financial hardship. The collection is halted and payments are deferred.
*   **Installment agreement:** An IRS installment agreement lets individuals pay taxes they owe by making regular monthly payments over a specific, extended timeframe. Interest and penalties may accrue.
*   **Penalty abatement:** The IRS may reduce or remove penalties due to reasonable causes including fire, natural disasters, and other disturbances; the death, serious illness, or incapacitation of the taxpayer or a member of their immediate family; or an inability to obtain tax-related records.  
    

## What Is the Difference Between a Tax Credit and a Tax Deduction?

[Tax credits lower the tax owed, while tax deductions reduce taxable income.](https://www.investopedia.com/tax-write-off-vs-tax-deduction-vs-tax-credit-11679611) Credits provide the most substantial savings. For example, a $1,000 tax credit lowers a tax bill by that same $1,000. Meanwhile, a $1,000 tax deduction reduces taxable income by that amount. For those who fall into the 24% tax bracket, a $1,000 deduction would shave $240 off of a tax bill.  

## What Is an Adoption Credit?

The maximum credit allowed for those who adopt a child with special needs is qualified adoption expenses up to $16,810 for the tax year 2024 and $17,280 for the tax year 2025.

  

## What Is the Annual Gift Exclusion for 2024 and 2025?

The annual exclusion for gifts is $18,000 for 2024. Taxpayers can give up to $18,000 tax-free to as many people as they wish without using any of their lifetime gift and [estate tax exemption](https://www.investopedia.com/estate-tax-exemption-2021-definition-5114715). The exclusion increases to $19,000 in 2025.

## The Bottom Line

Tax relief is government programs or policies that help lessen the burden of taxes for individuals. These are usually done through tax deductions, credits, and exclusions.

> **Article Sources**
>
> 1.  Pew Charitable Trust. "[How States Are Working to Address The Retirement Savings Challenge](https://www.pewtrusts.org/en/research-and-analysis/reports/2016/06/how-states-are-working-to-address-the-retirement-savings-challenge)."
>     
> 2.  Internal Revenue Service. "[Tax Relief in Disaster Situations](https://www.irs.gov/newsroom/tax-relief-in-disaster-situations)."
>     
> 3.  Internal Revenue Service. "[About Schedule A (Form 1040), Itemized Deductions](https://www.irs.gov/forms-pubs/about-schedule-a-form-1040)."
>     
> 4.  Internal Revenue Service. "[IRS Releases Tax Inflation Adjustments for Tax Year 2025](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025)."
>     
> 5.  Internal Revenue Service. "[IRS Provides Tax Inflation Adjustments for Tax Year 2024](https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024)."
>     
> 6.  Internal Revenue Service. "[Topic No. 551 Standard Deduction](https://www.irs.gov/taxtopics/tc551)."
>     
> 7.  Internal Revenue Service. "[Topic No. 501 Should I Itemize?](https://www.irs.gov/taxtopics/tc501)"
>     
> 8.  Internal Revenue Service. "[About Schedule A (Form 1040), Itemized Deductions](https://www.irs.gov/forms-pubs/about-schedule-a-form-1040)."
>     
>     [](https://www.irs.gov/pub/irs-pdf/i1040sca.pdf)
>     
> 9.  Internal Revenue Service. "[Topic No. 456, Student Loan Interest Deduction](https://www.irs.gov/taxtopics/tc456)."
>     
> 10.  Internal Revenue Service. "[Topic No. 458, Educator Expense Deduction](https://www.irs.gov/taxtopics/tc458)."
>      
> 11.  Internal Revenue Service. "[Publication 969 Health Savings Accounts and Other Tax-Favored Health Plans](https://www.irs.gov/publications/p969)."
>      
> 12.  Internal Revenue Service. "[Credits and Deductions for Individuals](https://www.irs.gov/credits-deductions-for-individuals)."
>      
> 13.  Internal Revenue Service. "[Lifetime Learning Credit](https://www.irs.gov/credits-deductions/individuals/llc)."
>      
> 14.  Internal Revenue Service. "[American Opportunity Tax Credit](https://www.irs.gov/credits-deductions/individuals/aotc)."
>      
> 15.  Internal Revenue Service. "[Publication 550, Investment Income and Expenses](https://www.irs.gov/publications/p550)."
>      
> 16.  Internal Revenue Service. "[Publication 525, Taxable and Nontaxable Income](https://www.irs.gov/publications/p525)."
>      
> 17.  Internal Revenue Service. "[Employee Benefits](https://www.irs.gov/businesses/small-businesses-self-employed/employee-benefits)."
>      
> 18.  Internal Revenue Service. "[Topic No. 502 Medical and Dental Expenses](https://www.irs.gov/taxtopics/tc502)."
>      
> 19.  Internal Revenue Service. "[Topic No. 701 Sale of Your Home](https://www.irs.gov/taxtopics/tc701)."
>      
> 20.  Internal Revenue Service. "[Foreign Earned Income Exclusion](https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion)."
>      
> 21.  Internal Revenue Service. "[IRS Announces New Effort to Help Struggling Taxpayers Get a Fresh Start; Major Changes Made to Lien Process](https://www.irs.gov/pub/irs-news/ir-11-020.pdf)."
>      
> 22.  Internal Revenue Service. "[Offer in Compromise](https://www.irs.gov/payments/offer-in-compromise)."
>      
> 23.  Internal Revenue Service, Taxpayer Advocate Program. "[Currently Not Collectible](https://www.taxpayeradvocate.irs.gov/get-help/paying-taxes/currently-not-collectible/)."
>      
> 24.  Internal Revenue Service. "[Additional Information on Payment Plans](https://www.irs.gov/payments/payment-plans-installment-agreements)."
>      
> 25.  Internal Revenue Service. "[Penalty Relief Due to Reasonable Cause](https://www.irs.gov/businesses/small-businesses-self-employed/penalty-relief-due-to-reasonable-cause)."