Understanding the difference between tax credits and tax relief is important, especially if you’re trying to reduce your taxes or manage your IRS debt. Although the two terms are similar, they are applied at different stages of the tax process.
Tax credits reduce the amount of tax you owe when you file your return. Tax relief, on the other hand, refers to programs and options that help taxpayers manage existing tax debts, penalties, or payment issues. Simply put, tax credits are applied before taxes become a liability, and tax credits are applied after a tax balance is incurred.
Understanding how these terms differ can help you set realistic expectations and choose the right next steps and the right professional assistance when dealing with taxes.
What is a tax credit?
Tax credits directly reduce the amount of federal income tax owed. If you qualify, the credit reduces the amount of federal income tax you owe dollar for dollar.
There are two main types of credits.
- Refundable tax creditThis will reduce your tax liability to less than zero and may result in a refund if your tax liability is less than the credit amount.
- Non-refundable credit. You can reduce your bill to zero, but never more.
Common tax credits include:
- Earned Income Tax Credit (EITC): This is a refundable tax credit designed to benefit low- to moderate-income workers and their families. If you meet the conditions, the tax you owe will be reduced and you may receive a refund even if you haven’t paid the tax. For tax year 2025, the credit ranges from $649 to $8,046, with amounts based on income, filing status, and number of qualifying children.
- Child Tax Credit (CTC): This is a non-refundable tax credit that helps reduce your taxes if you have qualifying children under the age of 17. The maximum amount is $2,200 per eligible child. A portion of the CTC may be refunded through the Additional Child Tax Credit (ACTC) if it exceeds the amount of tax owed. Up to $1,700 per eligible child, depending on income. To qualify for ACTC, you must earn at least $2,500. At the same time, your annual income cannot exceed $200,000 ($400,000 for married couples filing jointly) to qualify for the full CTC.
- American Opportunity Tax Credit (AOTC): This is a credit that refunds a portion of qualified educational expenses paid to eligible students during the first four years of post-secondary education. The annual credit limit is $2,500 per eligible student. Even if you don’t owe taxes, you may receive a refund of 40% of the balance of your credit (up to $1,000). To qualify for the maximum credit, your modified adjusted gross income (MAGI) must not exceed $80,000 ($160,000 for married couples filing jointly).
Tax credits are applied during the filing process, potentially avoiding the need for tax credits later.
What is tax relief?
Tax abatement is a collective term for programs and rules that help manage or reduce tax debts and penalties. Unlike credits, relief is typically applied after a tax balance exists.
Examples of IRS tax relief programs include:
- IRS payment plans that allow you to pay over time: Installment agreements allow you to spread your tax payments over monthly payments instead of paying them all at once. A payment plan does not reduce the amount you owe. Interest and penalties typically continue to accrue while the balance is paid.
- Reduction of penalties such as reduction of administrative penalties and reduction for justifiable reasons: If you have a track record of filing and paying on time, or if you were unable to meet the deadline due to circumstances such as illness or natural disasters, reduced penalties may apply. Both types of relief may reduce the penalty but do not eliminate the interest owed.
- Compromised offer: This option may allow you to settle your tax debt for less than the full amount of your tax liability, based on what the IRS believes it can reasonably collect based on your income, assets, and living expenses. Approval is not automatic and your application may be denied if the IRS determines that you will be able to repay your debt in full over time.
Deductions and credits are sometimes loosely described as relief, but in IRS terminology, relief typically refers to post-filing options.
“IRS tax relief programs are typically considered after your tax liability has been established and you are no longer able to pay,” said Mac Gardner, certified financial planner and founder and chief education officer of FinLit Tec. “Tax credits and deductions are tools that can be used to file this year’s tax return. They help taxpayers (effectively) reduce their current tax liability for the year in which they file their return.”
Tax credits and tax relief: key differences
Here’s a quick way to think about tax credits and tax relief.
When tax credits and tax reductions overlap
In some situations, credit and relief can work together. for example:
- Claiming a tax credit may reduce your taxes so much that you won’t need relief later.
- Deductions reduce your taxable income and reduce your chances of paying taxes.
- Tax credits may help you avoid penalties associated with underpayments.
This overlap may be why people sometimes confuse the two, even though each tool works differently.
How the IRS Determines Eligibility for Tax Relief
When you apply for tax relief, the IRS looks at your complete financial situation. This typically includes:
- income from any source
- Living and business expenses
- Assets such as bank accounts and real estate
- Do you have a track record of filing and paying on time?
- Ability to pay now or over time
This review helps the IRS determine which tax relief options are available.
How to find out what tax credits or reductions you are eligible for
Start by reviewing your tax return and any IRS notices you received. The IRS Interactive Tax Assistant (ITA) can help you identify potential credit or filing problems.
You can also request records of your IRS account to see what the agency has on file, including unpaid balances, penalties assessed, and if you missed any returns. If your situation involves unpaid taxes or penalties, you may choose to consult with a CPA or enrolled agent who can help you understand what options apply to you before taking action.
When assistance from a tax professional makes sense
Some people handle IRS issues on their own, but if you’re dealing with tax debt, IRS collections, multiple years of unfiled returns, or a complex financial situation, professional help may make sense.
In such cases, some people may turn to a tax professional or tax relief company to help evaluate options and communicate with the IRS. Companies that can help with tax resolution include Optima, Anthem Tax Services, Alleviate Tax, BC Tax, and Priority Tax Relief. Working with any company does not guarantee a specific outcome and IRS approval is always required.
conclusion
While tax credits reduce the amount owed when filing a return, tax relief programs can help taxpayers manage existing IRS debt. Understanding this difference can help you focus on the right solution for your situation, whether that means claiming available credits or considering IRS resolution options.
If you’re looking for professional support, you can use our interactive map of tax relief providers to compare companies and find support in your area.
Frequently asked questions about tax credits and tax relief
Are tax credits considered tax relief?
Tax credits are generally not considered tax credits in the IRS’s technical sense. Although tax credits reduce the amount of taxes owed when filing a return, tax credits typically refer to programs that help taxpayers manage or resolve existing IRS debt. This difference in timing explains why tax credits reduce the tax liability before penalties and collections begin, whereas tax credits are applied after a tax balance has accrued.
Do tax credits reduce tax liability?
Tax credits can help prevent tax debt by reducing the amount you owe, but they usually don’t apply if you already have a balance in your account. If you already received a bill from the IRS in a given tax year, claiming the credit in another tax year may not erase that existing debt.
Do I need to apply for the credit before applying for tax relief?
Yes, in most cases you will need to claim a credit. Claiming the credit first may reduce or eliminate the need for later relief and may change the IRS options you are eligible for if you have a balance remaining.
