What Is a Tax Break: Definition, Types, and How to Obtain One

Taxes are a near certainty in life, but what if you could reduce the amount you owe? Tax breaks allow you to do just that: Lower your taxable income and tax liability using federal government-provided benefits. Tax breaks are typically available thanks to tax laws and usually offer credits or deductions you can claim against the income tax you owe. 

In this guide, we’ll explain everything you need to know about tax breaks, including what they are, the different kinds, and the best practices to take advantage of them. Let’s take a look.

Key Takeaways

• A tax break is any federal government-provided benefit that reduces income tax liability.
• Tax breaks can be claimed by individual and corporate taxpayers, usually coming in the form of credits and deductions or through special exemptions that reduce your taxes owed.
• There are 4 main types of tax breaks: Tax deductions (which reduce your taxable income), credits (which reduce your taxes after deductions for more savings), exemptions (which shelter some kinds of income from taxation), and exclusions (which shelter specific organizations, like churches and charities, from any income tax).
• Generally, tax deductions and credits are most available for people with low and moderate incomes and those who have experienced a significant life event, such as having children, selling a home, attending school, or receiving a life insurance benefit.

Table of Contents

• What Is a Tax Break?
• How Do Tax Breaks Work?
• Different Types of Tax Breaks
• Who Is Eligible for Tax Breaks?
• Use FreshBooks to Optimize Your Tax Savings
• FAQs About Tax Breaks

What Is a Tax Break?

A tax break is any benefit that allows you to reduce the amount you owe in income taxes. Usually, this is in the form of credits and tax deductions, but it may also refer to favorable tax laws for specific organizations, such as churches and charities. 

You also might receive a particular type of tax break for natural disaster relief. In general, these tax breaks reduce your tax bill as an average taxpayer, strengthening the economy and leaving you with more money in your pocket. 

How Do Tax Breaks Work?

Tax breaks are available for both individual and corporate taxpayers. When you claim them, these tax breaks help to reduce your taxable income, meaning you’ll owe less money in income taxes when it’s time to file. Typically, tax breaks don’t put money in your pocket. Instead, they come in the form of credits, tax deductions, or other special benefits that reduce the amount you need to pay in tax. Sometimes, you may receive a tax refund if your tax liability is lower due to the tax breaks.

You can claim some tax breaks automatically, while others have specific criteria and application processes. For instance, the IRS generally doesn’t tax the proceeds of payouts from life insurance policies—this is an example of a tax break you can receive without taking action. On the other hand, you might receive an environmental tax break if you switch out an inefficient gas-powered vehicle for an electric one, but the process to claim this credit is more involved.

Different Types of Tax Breaks

The tax break process generally depends on the type you’re hoping to get. Tax breaks include exemptions, deductions, credits, and exclusions. Let’s look at each in more detail:

Tax Deductions

A tax deduction reduces your taxable income. You can deduct any allowable expense you incur during the tax year. By deducting these expenses, you lower your taxable income, which means your income tax will be lower. So, if you deduct $1,500, your taxable income would decrease by $1,500 as well. Standard tax deductions include:

• mortgage interest (for the first $750,000 of secured mortgage debt)
• unreimbursed medical expenses exceeding 7.5% of your adjusted gross income (AGI)
• up to $10,000 in state/local taxes
• charitable contributions
• casualty and theft losses
• gambling losses

You have 2 choices regarding tax deductions: Record and itemize every expense you pay for and deduct the actual dollar amount, or take the standard deduction for the given tax year. If your expenses are more than the standard tax deduction for your filing status, we recommend itemizing them instead. The standard deduction rates for 2024 are as follows:

Filing status	Standard deduction for 2024
Single	$14,600
Married filing separately	$14,600
Married filing jointly	$29,200
Heads of household	$21,900
Surviving spouses	$29,200

Tax Credits

Tax credits are a way to reduce taxes dollar-for-dollar. Rather than simply lowering your taxable income, these tax credits reduce the amount on your income tax bill. Let’s say that you owe $5,000 in income taxes after making your deductions. If you receive a $1,200 tax credit, you would only have to pay $3,800 in income tax. There are also refundable tax credits, which reduce your tax bill and can give you money back, which you can’t do with deductions. Because of this, tax credits are worth more than deductions (though you can and should take advantage of both tax deductions and tax credits).

Common tax credits you may be eligible for include:

• Earned-Income Tax Credit (EITC): This tax credit is for those with low to moderate incomes.
• Child Tax Credit: This is for parents who make less than $200,000 in modified adjusted gross income (MAGI) per year.
• Lifetime Learning Credit: This tax credit is for people who paid expenses related to college, graduate, or vocational school (even if they’re not in a degree program or aren’t full-time students), such as qualified tuition, fees, and other school-related costs.

Tax Exclusions

Under the income exclusion rule, the IRS doesn’t tax some income types. These include income from child support, welfare payments, death benefit payouts from life insurance, and municipal bond income. You can also exclude any health insurance premiums that your employer pays and often your portion of the premiums.

Another significant tax exclusion to be aware of is capital gains from selling your primary residence. If you have owned and lived in a home for at least 2 of the previous 5 years and have not excluded the gain of the sale of another home in the past 2 years, you can exclude up to $250,000 in capital gains from your income tax—or $500,000 if married filing jointly. 

There’s also a tax exclusion for foreign-earned income, which you may be eligible for if you earn some of your income in another country. For 2024, individuals can exclude up to $126,500 of foreign-earned income from their taxable income. The amount is double if you’re married, file jointly, and both spouses work abroad.

Tax Exemptions

The last kind of tax break is tax exemptions, which allow specific individuals and income types to be completely exempt from taxation. Exemptions come off the top of your income, preventing some of it from being subject to income tax. Individuals can no longer claim tax-exempt status since the Tax Cuts and Jobs Act of 2018. Generally, only charities, churches, and other non-profit organizations can claim tax exemptions. To do this, the IRS must approve and recognize them as tax-exempt.

Who Is Eligible for Tax Breaks?

Typically, tax breaks are easier to receive for those at a low or moderate income level. As your income rises, many tax breaks are gradually phased out, with most becoming completely unavailable when you reach a certain maximum income threshold. 

Other tax breaks encourage specific economic actions, such as incentivizing workers to contribute to retirement accounts by deferring taxes on those contributions. You might qualify for certain tax breaks depending on events in your life, such as tax credits for returning to school, buying or selling a home, or receiving a life insurance payment after losing a spouse or other family member. In the case of these tax breaks, you’ll need to check individual eligibility requirements to ensure you qualify.

Use FreshBooks to Optimize Your Tax Savings

If you’re looking to save as much as possible on your taxes this year, you need a tool to help you track your expenses, categorize your deductions, and generate detailed financial reports to keep you on track throughout the tax year. FreshBooks is here to help!

FreshBooks automated invoicing software makes it simple for business owners to get paid and track their taxable income. FreshBooks expense tracking software, meanwhile, is an efficient way to track your costs and create year-end tax summaries that simplify the tax prep process. These powerful tools can help you optimize your tax savings and keep more money in your pocket when it’s time to pay. Try FreshBooks for free!

FAQs About Tax Breaks

Still curious about tax breaks and how to get them? Here’s everything else you need to know.

What Are the Benefits of Tax Breaks?

Tax breaks reduce your taxable income, lower the amount of taxes you owe, or exclude income from being taxed entirely. Though there are several different kinds, they all help you pay less on your income tax bill.

What Is an Example of a Tax Break?

An example of a tax break would be the capital gains tax exclusion for selling your primary residence. If you lived in a home for 2 of the last 5 years (and haven’t claimed this exclusion in the past 2 years), you can exclude up to $250,000 ($500,000 if married filing jointly) of the capital gains from the sale from your taxes.

Do You Get Money Back From Tax Breaks?

Some tax credits, like the child tax credit, are refundable, meaning that if the credit exceeds your total tax liability (or you’re owed a refund), you’ll receive that money back after filing your income tax. Tax deductions, exclusions, and other tax breaks are non-refundable, meaning they lower your tax bill but won’t give you any money back.

What Can I Use as a Tax Break?

You can claim many of your expenses as a tax deduction to lower the tax you owe, including mortgage interest, unreimbursed medical expenses, and some state and local taxes. A person with children, attending post-secondary schooling, or falling under certain income thresholds also likely qualifies for tax breaks. 

Who Gets More Tax Breaks?

Generally, people with low and moderate incomes will receive more tax breaks than those who make more. As income levels increase, the IRS phases out or eliminates many tax breaks and benefits.

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