What Is the Difference Between Tax Relief & Tax Credit?

What Is the Difference Between Tax Relief & Tax Credit?
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Taxes are a certain part of life from which almost no member of society is exempt. While you may not be able to escape your responsibility of paying taxes, there are tax breaks that can help ease the burden for some tax-paying citizens. Tax relief and tax credits are similar, and they can both offer a potential reduction in your total tax bill.

Tax Relief

Tax relief is also commonly referred to as a tax deduction. Tax relief generally refers to specific tax breaks that can help reduce the total amount of taxes you owe. Tax relief programs are typically associated with federal tax programs, but they may also be administered on a state and local level. In most cases, tax relief or tax deductions can lower your tax burden by a specific percentage, depending on your current tax bracket.

How Tax Relief Works

TaxPolicyCenter.org indicates that tax relief or tax deductions work by reducing the total amount of taxable income. The value of the tax deduction typically depends on the taxpayer’s tax bracket or marginal tax rate. A tax deduction can only reduce taxable income by a set percentage of your total income.

Tax Credits

According to Energy.gov, tax credits are often considered more valuable than tax deductions because a tax credit reduces your tax bill on a dollar-for-dollar basis instead of reducing your taxes by a percentage according to your tax bracket. A tax credit allows you to reduce your tax bill by the dollar amount stipulated by the terms of the credit no matter how much money you earned during the year.

How Tax Credits Work

Tax credits are unique in that they have the same tax-reducing value for all taxpayers regardless of your total income and tax liability. A tax credit can reduce the amount of taxes you owe by the total amount of the credit regardless of whether you made $30,000 or $100,000 in a given tax year. Additionally, some tax credits are refundable credits that may put cash back in your hands.

Types of Deductions and Credits

The types of tax relief and tax credit programs for which you are eligible may vary depending on your personal circumstances. You may be eligible for certain tax breaks if you have children, if you own a home or if you invested in energy improvements for your home or business.