Tax breaks refer to any applicable tax laws that reduce the amount of taxes you owe at the end of the year. Learn more about tax breaks in the video below.
The term tax break covers any tax law that can reduce the amount of tax you owe at the end of the year. Common tax breaks include deductions, credits and exemptions. Not all tax breaks offer the same level of savings. The most valuable of the three is a tax credit because it reduces the amount of tax you owe on a dollar for dollar basis. This means that if at the end of the year you owe $10,000 in taxes, claiming a $1,000 tax credit reduces your tax bill to $9,000.
Tax credits also come in two forms, refundable and nonrefundable.
A refundable credit can provide you with a tax refund. If it equals more than the amount of tax you owe. Whereas a nonrefundable credit does not provide any benefit beyond reducing your actual tax liability. The more commonly claimed tax breaks are deductions and exemptions.
An exemption is a standard amount you can subtract from your taxable income for each dependent you report on your tax return. It is the same amount for all taxpayers. A deduction, on the other hand, relates to an actual expense you paid during the year such as mortgage interest and medical expenses. Deductions let you offset the cost by subtracting a percentage of them from your taxable income. By lowering your taxable in come, you lower the amount you pay in taxes.