What Is Tax Relief?

How does tax relief work?

Tax relief programs and initiatives aim to alleviate taxpayers' burdens by offering deductions, credits and exclusions. Additionally, initiatives aid taxpayers in settling overdue tax debts, potentially preventing liens.

Government policy drives amendments to the federal tax code, often to address societal concerns such as insufficient retirement savings. For instance, incentives such as individual retirement accounts (IRAs) and 401(k) plans encourage retirement savings.

Tax relief extends to those affected by natural disasters. The IRS announces relief measures for individuals and businesses hit by severe weather, wildfires or droughts, providing extensions, waivers and deductions for losses.

You can claim the deductions you qualify for when filing for your taxes.

» LEARN: How does tax relief work?

Types of tax relief

Deductions, credits and exclusions are three distinct forms of tax relief that you may qualify for.

Deductions

Tax deductions are items you can claim to reduce your taxable income, thereby lowering your tax bill. In the following section, we go into detail about three examples of tax deductions: interest paid on student loans, mortgage interest and retirement account contributions.

Credits

Tax credits are dollar-for-dollar reductions of your tax bill. You may qualify for specific credits if you pay for higher education, if you’re a parent or caretaker, or other eligible circumstances apply to you.

If you invested in eligible new, clean energy products for your home (such as solar, wind or geothermal technology) last year, you may qualify to claim the Residential Clean Energy Tax Credit when you file taxes for 2025. This credit equals 30% of the cost of your new clean energy property, but anything installed after Dec. 31, 2025, is not eligible.

Some tax credits are refundable, meaning you can get back more than you pay in taxes. For example, if you qualify for the Earned Income Tax Credit for low-to-moderate income workers, you can claim it even if you aren’t required to file taxes.

Exclusions

Not all income or benefits are subject to federal income tax. Life insurance payouts (death benefits) and child support payments aren’t taxable, for example.

Common tax deductions

Income tax deductions can help you manage your financial burden when you’re buying a home, paying student loans or saving for retirement.

Student loan debt

While student loan payments aren’t deductible, the interest accrued on the balance is. The student loan interest deduction allows you to deduct the interest you paid (up to $2,500) during the year. You can only deduct student loan interest if your modified adjusted gross income (MAGI) is beneath a threshold that the IRS sets each year, and neither you nor your spouse are claimed as a dependent on someone else’s return.

For example, let's say you have a $29,000 student loan with a 5% annual interest rate. At the end of the standard 10-year repayment plan, you’d pay $308 (with $121 going toward loan interest). During the one-year repayment, you’d repay $3,691 ($2,393 in principal and $1,398 in interest). If you’re eligible for student loan interest relief, you can deduct the $1,398 from your taxable income.

Mortgage interest

As a homeowner, you can take advantage of mortgage interest deduction to reduce your taxable income and lower your tax bill.

If you’re eligible for the mortgage interest deduction, you can deduct interest on the first $750,000 of indebtedness ($375,000 if you’re married filing separately). So if your mortgage balance is less than this, your mortgage interest is fully deductible.

Limitations of $1 million ($500,000 if married filing separately) apply to deducting mortgage interest from indebtedness that predates Dec. 16, 2017.

Retirement savings

Retirement savings are another great way to reduce your tax bill. You save for the future and minimize your tax liability. It's a win-win.

However, the type of retirement account you choose determines when you enjoy the tax deductions. For example, if you contribute to a 401(k), your contribution is deducted from your gross income, which lowers your tax liability by reducing your taxable income.

You also have the choice to open a Roth IRA, contribute after-tax dollars to your retirement fund, and enjoy tax-free withdrawals after the age of 59½ years.

Types of tax debt relief

If you have a tax debt that you can’t pay, a tax debt relief program can help you avoid wage garnishments, tax liens and levies. Here are some options you may qualify for, depending on your situation.

Offer in compromise (OIC)

This program allows you to pay less than you owe the government in taxes. Taxpayers are only eligible if they can’t afford to pay their tax debt with their current financial ability or if paying the tax debt in full would cause a financial strain.

Currently not collectible (CNC)

If your gross monthly income is too low to cover your tax debt without causing financial hardship, the IRS can pause your tax payments under this program. You can defer payment until you’re back on your feet without facing penalties.

Penalty abatement

The IRS can lift your penalties if you have a good reason for not filing your taxes. Unfortunately, being low on funds doesn’t count in this case. Acceptable reasons include incapacitation, serious illness and natural disasters.

Innocent spouse relief

If your spouse — current or former — makes an error when filing taxes, the IRS might lift the penalties that the error may trigger. You’re only eligible if you can prove you had no way of knowing about the error.

Installment agreement

This program allows you to spread your tax payments if you can’t pay in full right away when you file your income tax return. The IRS might continue increasing the interest and penalty fee until you clear the balance, however.

» MORE: How to file back taxes

Bottom line

Tax season is a stressful time, and no one looks forward to a tax bill. Familiarizing yourself with tax relief options can help make the season bearable. You can reduce your taxable income and tax bill through relief programs by claiming your tax credit or reducing taxable income.