Learn Tax Break Definition, Different Types, and How to Get One

Types of Tax Breaks

Tax Credits

A tax credit decreases your taxable income dollar for dollar. This has a higher impact than a deduction, which just reduces the amount of taxable income.

 

A tax credit is applied to the amount of tax owed after all deductions from your taxable income have been deducted. For example, if you owe $3,000 in taxes and are entitled to a $1,100 tax credit, the amount you owe after the tax break is applied is $1,900 ($3,000 – $1,100).

Corporations can also use tax credits to reduce their tax liabilities. These are permitted by the government in order to benefit workers and the national economy.

Certain credits, such as corporate tax credits, investment credits, and worker child care credits, are implemented independent of industry or sector. They can also be more sector-specific, such as those in agriculture, energy, and mining.

Tax Deductions

Tax deductions are expenses that can be deducted from your gross income to lower your taxable income and, thus, your tax payment. A $1,000 tax deduction, for example, would reduce your taxable income by the same amount.

 

The amount of the deduction is determined by your tax bracket. If you are in the 22% tax bracket, a $1,000 tax deduction will save you $220 ($1,000 22%) on your tax payment.

Most taxpayers can choose between taking the standard deduction (a predetermined dollar amount depends on your filing status) and itemizing their deductions on Schedule A of Form 1040 or 1040-SR.