Tax break definition and tax break types

What is a tax break?

A tax break is a rule, law, or policy that can lower your tax bill, whether it be a tax deduction, tax credit, tax exclusion, or tax exemption. The most common are tax credits and tax deductions. Put simply, a tax deduction decreases your taxable income, while a tax credit cuts your tax bill directly, dollar-for-dollar.

Common types of tax breaks

The most common types of tax breaks are tax deductions and tax credits. There are also tax exemptions and tax exclusions. We will delve into some examples below.

What are tax deductions?

Tax deductions are sometimes referred to as “tax write-offs,” although the IRS doesn’t include this phrase in the Internal Revenue Code.

Deductions provide a benefit by allowing you to deduct a certain amount from your taxable income, which means you pay less in taxes. It’s important to note that tax deductions won’t have as much of an impact unless you itemize, which usually makes sense for people with a considerable amount of deductions.

Deductions help you in two ways. You are not taxed on the income you deduct, and your deductions might land you in a lower tax bracket, so you pay a smaller percentage.

You subtract the amount of the tax deduction from your income, making your taxable income lower. The lower your taxable income, the lower your tax bill. The IRS allows you to reduce your taxable income by using the standard or itemized deductions.
As part of the Inflation Reduction Act, the standard deduction for married couples filing jointly for tax year 2023 rises to $27,700, up $1,800 from the prior year.

For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900. And for heads of household, the standard deduction will be $20,800 for tax year 2023, up $1,400 from the amount for tax year 2022. 

Standard deduction amounts for 2023 taxes (Returns due April 2024)

 If your total itemized deductions exceed the amounts above, you should consider itemizing. If you have less than the standard deduction to write off, stick with that. A Jackson Hewitt Tax Pro can help decide what is best for your specific situation. 

The IRS also provides a list of itemized deductions and the requirements for claiming them on Form 1040, Schedule 1.  

Some of these include: 

• Educator expenses;
• Health savings accounts (HSAs);
• Several self-employment costs, such as retirement plan contributions, health insurance premiums, and half the self-employment tax as reported on Schedule SE;
• Savings withdrawal penalty amounts;
• Student loan interest;
• Tuition and other education expenses;
• The traditional IRA deduction;
• Alimony paid in 2018 or earlier;
• Moving expenses for certain members of the military;
• Costs incurred by military reservists, performing artists, and fee-based government officials; and
• Qualified Business Income Deduction.

Are there any special deductions if you own a business?

It’s important to note that self-employed workers and small-business owners might be eligible for a deduction of 20% of eligible income before taxes.  This is call the Qualified Business Income Deduction (QBI).

The QBI is one of the most common tax write-offs for self-employed workers. For tax year 2023 (filed in 2024), this type of deduction if your taxable income falls below $182,100 for individuals, or $364,200 for joint returns and certain taxpayers with higher business income.

The QBI does not include wages earned as an employee and business-generated capital gains, interest, and dividend income. You can work with your Tax Pro to see what other deductions may apply for your business.

What are tax credits?

As mentioned above, tax credits give you a dollar-for-dollar reduction in the amount of tax you owe.

Below are some examples of popular tax credits, but your Jackson Hewitt Tax Pro can work with you on which ones which work for you and your family.

Earned Income Tax Credit (EITC)

For 2023, the EITC can potentially give you between $560 and $6,935, depending on how many children or dependents you have. This is something to explore if your adjusted gross income (AGI) is below $59,000. AGI is gross income minus certain adjustments–such as tax credits and tax deductions—to that income. Gross income refers to the total income earned by someone on a paycheck before taxes and other deductions. Your AGI is extremely important, because it’s the basis for figuring out your taxable income.

Child Tax Credit

You can claim the full Child Tax Credit if your modified adjusted gross income (MAGI) is under $200,000—or under $400,000 if you and your spouse file a joint return. If your MAGI is greater than $200,000 ($400,000), the credit is reduced by $50 for each $1,000 over the threshold amount.

 
Lifetime Learning Credit 

If you paid expenses related to college, graduate, or vocational school, you may claim the Lifetime Learning Credit, one of the most popular tax breaks. This is a non-refundable credit of up to $2,000 (per return) of qualified tuition, fees, and expenses you paid for yourself, spouse, or a dependent. A non-refundable tax credit means you only get back what you owe, and it does not get added to your refund. You do not have to be in a degree program, a full-time student, or in the first four years of post-secondary education. 

What are tax exemptions?

Tax exemptions aren’t the same as tax credits and tax deductions. Tax exemptions bring down what counts as income. Exemptions come right off the top, while deductions are generally expenses you’ve incurred throughout the year to bring down the amount subject to tax. There had been two kinds of income tax exemptions—personal exemptions for you and a spouse and dependency exemptions for your children or dependents–but these ended with the new tax rules that went into place in 2018, with the ushering in of the Tax Cuts and Jobs Act.

Generally, being tax-exempt means that some or all of a transaction, entity or person’s income or business is free from federal, state and local tax. Tax-exempt organizations are typically charities or religious organizations recognized by the IRS. Once approved and recognized, these organizations do not have to pay federal tax, and any donations to them are tax deductible.

What are tax exclusions?

The income exclusion rule makes certain kinds of income non-taxable. There are many types of income that fall under this rule, such as child support, welfare, municipal bond income, and life insurance death benefit proceeds. You can work with your Tax Pro to determine if you have types of income that fall into this category.

Who qualifies for tax breaks?

The short answer is that all U.S. taxpayers should qualify for some form of tax break, but this is dependent on your specific situation. There are income and situational criteria for all the tax breaks, some of which you’ll see above.

Tax breaks are crucial when it comes to filing your taxes, and can make the difference between paying at the end of the year—or receiving a refund. Our Tax Pros are here to work with you on what makes the most sense for you and your family. Find an office near you today.

About the Author

Jo Willetts, Director of Tax Resources at Jackson Hewitt, has more than 35 years of experience in the tax industry. As an Enrolled Agent, Jo has attained the highest level of certification for a tax professional. She began her career at Jackson Hewitt as a Tax Pro, working her way up to General Manager of a franchise store. In her current role, Jo provides expert knowledge company-wide to ensure that tax information distributed through all Jackson Hewitt channels is current and accurate.

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