What is tax break/incentives and why they are important?
Taxes are complicated no matter which country you reside in. They play an important role for the government in financing social projects. Tax breaks and incentives are provided by the government to enhance growth in various sectors and industries in the country. Most governments fund programs either by directly financing or investing using taxpayer money or by incentivizing third parties to do it on their behalf.
While on one hand tax incentives are easy to implement, they don’t require any direct payment from taxpayers into public institutions, but rather use the information and reporting collected by government agencies to unlock savings. But on the other hand, having too many tax incentives can prevent a country from having a simple, transparent tax system.
Who creates tax breaks/incentives?
When the government offers you a tax break, it means you’re getting a reduction in your taxes. A tax break can come in a variety of forms, such as claiming deductions or excluding income from your tax return. In some situations, a tax break may not even require any action on your part at all if it relates to a reduction in the overall income tax rates or an increase in the value of the exemptions you claim.
Behind every tax break/incentive is a tax law that the government passes that explains how the tax break or incentive works. For example, while you browse through the Staxe website, you might notice a button that says Earn Tax credits. These are tax credits obtained by investing in cultural projects located within Spain that the government has approved. The motivation for issuing such breaks/incentives or credits is for the government to encourage investment in local culture.
What is the difference between Tax deductions and tax credits?
A tax deduction lowers a person’s tax liability by reducing their taxable income. It subtracts past expenses and/or investments from your taxable income and thus lowers the amount of tax you owe.
A tax credit is a euro-for-euro reduction of the income tax owed. Think of it as a coupon for saving X amount of your resulting taxes owed at the end of the year.. Tax credits can be refundable or nonrefundable. While nonrefundable tax credits allow you to reduce your tax liability to zero, refundable credit also allow you to reduce your tax liability to zero but with an added benefit, if there is any amount leftover from your refundable credit after reducing your tax to zero, you get the balance back as a refund.
You can choose any of the options you qualify for. The best one for you varies from person to person, depending on their income and tax situation. Staxe has built a simple tool for unlocking tax breaks while supporting cultural projects via NFTs (currently only available for Spanish-based SME’s and freelancers). Want to know how much you can save on taxes? Check out our tax-savings calculator to get an estimate of your personalized savings potential for supporting music and culture!
