Taxes Tax Planning What Is a Tax Benefit? By Jake Safane Jake Safane Twitter Website Jake Safane is a freelance writer with more than 10 years of experience in the journalism industry. He writes about investing, assets, markets, and more. Jake has been published in a variety of publications that focus on finance and sustainability. Prior to freelance writing, Jake was the thought leadership editor at The Economist Intelligence Unit. learn about our editorial policies Updated on November 15, 2022 Reviewed by Eric Estevez Reviewed by Eric Estevez Eric is a duly licensed Independent Insurance Broker licensed in Life, Health, Property, and Casualty insurance. He has worked more than 13 years in both public and private accounting jobs and more than four years licensed as an insurance producer. His background in tax accounting has served as a solid base supporting his current book of business. learn about our financial review board Fact checked by J.R. Duren Fact checked by J.R. Duren J.R. is a terms editor at The Balance, a role in which he focuses on providing clear answers to common questions about personal finance and small business. J.R. has more than 10 years of experience reporting, writing, and editing. As an editor for The Balance, he has fact-checked, edited, and assigned hundreds of articles. learn about our editorial policies In This Article View All In This Article How a Tax Benefit Works Example of a Tax Benefit What Tax Benefits Mean for Individuals Frequently Asked Questions (FAQs) Photo: Westend61 / Getty Images Definition A tax benefit is a deduction, credit, or other allowance that ultimately helps individuals or businesses reduce their tax liability. Key Takeaways A tax benefit is a rule that allows you to pay less in taxes than you would without the benefit.Tax benefits include tax credits, tax deductions, and tax deferrals. Some tax benefits can show up directly on your paycheck, whereas others have to be claimed on your tax return.Using tax software or working with a qualified tax professional can help you understand whether you qualify for tax benefits and how to use them. How a Tax Benefit Works A tax benefit is a provision that allows taxpayers to pay less in taxes than what they would owe if that benefit were not in place. Common tax benefits include deductions, credits, and exclusions. For example, a tax credit for qualified education expenses is a type of tax benefit. Tax benefits can also apply to areas such as retirement planning. Many different types of retirement vehicles exist, and the tax benefits aren’t always the same, but they typically help you reduce your tax bill in the long run. Note The IRS or other relevant agency sets rules in place to create a tax benefit that enables individuals or businesses to gain some sort of tax advantage. Tax benefits generally work by affecting tax withholdings and tax filings. When you do your taxes, for instance, you might claim a tax benefit like the student loan interest deduction (assuming you meet income requirements) or a tax credit. If you’re an employee, you might also have less tax money withheld from your paycheck based on tax benefits. For example, if you take public transportation, you might be eligible to have your employer set aside some of your wages to pay for a commuter pass. This cost would reduce your taxable income, so, in theory, you would lower your tax bill more than if you were to get your regular paycheck and buy a monthly subway pass yourself. In some cases, tax benefits are regulated by tax-specific laws. For example, the Tax Cuts and Jobs Act (TCJA) of 2017 affected many tax benefits—adding some and taking others away. One tax benefit added by the TCJA addressed how investments in areas known as opportunity zones could be eligible for deferred capital gains or even have those gains excluded from taxable income. However, the law also removed some benefits. For example, employers had previously been able to provide tax-free moving expense reimbursements to employees. But after the TCJA, those types of payments count as part of an employee’s wages, so the employee would owe income tax and employment taxes on those reimbursements. Example of a Tax Benefit A traditional 401(k) is a good example of tax benefits. The 401(k) tax benefit is that you can reduce your taxable income based on the contributions to your retirement account. Then, your 401(k) investments can grow tax-free. You don’t have to pay taxes until you withdraw the money later in life. In contrast, if you had deposited the money into a regular brokerage account, you wouldn’t be able to reduce your taxable income, and you would owe taxes on any capital gains and dividends earned. What Tax Benefits Mean for Individuals When it comes to taking advantage of tax benefits, it might often seem like you can do so automatically. Generally, if you make 401(k) contributions or pay for part of your health insurance through your employer, your paycheck will reflect those deductions and reduce your taxable income. That means you don’t have to calculate those tax benefits yourself when it’s time to file your taxes. That may require some work on your employer or payroll processor’s end, but it’s generally not something you’ll have to handle. Other times, however, you have to take action yourself. When filing your taxes, you might claim additional credits or deductions such as for making charitable contributions or investing in energy-efficient home improvements. Note Using tax software or working with a qualified tax professional can help you figure out what tax benefits you qualify for and how to best use them to your advantage. Frequently Asked Questions (FAQs) What is the meaning of a tax benefit? A tax benefit is any legal provision in the tax code that allows you to reduce your tax bill. What are the types of tax benefits? Deductions, credits, and exemptions are some of the main types of tax benefits. Deductions and exclusions lower your taxable income, while credits directly lower how much tax you owe. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. IRS. “Tax Cuts and Jobs Act: A Comparison for Businesses,” See "Opportunity for Tax-Favored Investments". IRS. “Tax Cuts and Jobs Act: A Comparison for Businesses,” See “Businesses with Employees: Changes to Fringe Benefits and New Credit.” IRS. "401(k) Plan Overview."