A tax benefit is a law that allows you to reduce the taxes that you have to pay as long as you are eligible. The amount that you save varies depending on the type of tax benefit that you claim because they are entirely different. They come in forms like deduction, exclusion, and credit. Here is what you should know:
- The most well-known tax benefit is tax deduction. A tax deduction reduces the income amount subject to tax. Claimed deductions can be as big as tuition fees and medical expenses so it is worth applying for.
- Another tax benefit is exclusion from tax. It excludes the income from your tax return. Some types of income are classified as tax-free under exclusions. One example of tax exclusion is the foreign earned income exclusion.
- The other tax benefit is tax credit. Tax credits provide a reduction of your owed income tax amount which is equivalent to one dollar for every dollar. You will be required an additional credit-specific form.
- As a bonus tax benefit, we will be talking about capital loss. Capital loss is not a great experience but it allows you a tax benefit. Taxpayers sell their stocks for less but you can compensate with other capital gains.
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