Tax relief is a term used to describe how a country encourages people or organisations to invest money in certain areas. It can take the form of tax exemptions, tax credits or lower taxes on certain activities. Governments may use tax relief to encourage investment in industries or sectors, to provide affordable housing and to spur job creation.
Tax reliefs can be broadly divided into three categories: direct relief, credits and deductions. Direct reliefs usually involve a tax-free sum of money, such as money for homeowners to cover the cost of repairs to their homes. Credits are a form of relief that reduces an individuals or organizations taxable income. Deductions also reduce taxable income, but they are typically more limited, reducing a specific area such as donations made to charity.
One of the most common forms of direct relief is a tax exemption. An exemption is a specific sum where taxes are not applied. Common exemptions may exist for groceries, medical expenses, home repairs and tuition payments. Credit relief is used to reduce taxable income. It means that a sum of money is subtracted from the taxpayers taxable income, reducing the amount the individual owes. For example, a taxpayer may be eligible for a tax credit related to a home improvement project, reducing the taxable amount of the money spent on the project.
Also popular is tax deduction. A deduction reduces a taxable amount by an amount equal to the percentage of the deduction. For example, a taxpayer may claim a deduction for charitable donations or for mortgage interest, which will reduce their taxable income by a certain amount. This amount can then be used to reduce the amount of taxes owed on the taxpayers overall income.
Another form of tax relief are incentives. Incentives are often used to encourage certain types of activities, such as clean energy investments, starting a small business or buying a new car. These incentives can take the form of a tax credit, reduced taxes or tax exemptions. Governments use incentives to encourage activities they deem beneficial to the economy or society at large.
Tax relief can be a useful tool for governments to encourage certain activities or to spur economic growth. Reliefs can reduce the amount of money individuals and organisations owe in taxes, freeing up money to invest and to spend on other activities. While there are some potential drawbacks to offering tax relief, such as a potential for abuse or reduced government revenue, it is generally seen as a beneficial way for governments to encourage economic activity and to promote social goals.
