It is my combat phase.
I attack with a spirit of the night enchanted with firebreathing. I have red mana open, so I can increase spirit's damage.
Opponent declares no blockers and says that he/she takes the damage. I respond by activating firebreathing.
Can they, as a reaction to firebreathing, cast an instant/use an ability to return spirit to my hand, preventing -all- the damage? Or does it just prevent firebreathing damage?
The reason for the opponent's action is simple. Taps my red mana.
There are multiple "steps" in combat involved here.
The simple answer is that damage from creatures is dealt only once, so you have to make all adjustments to their power before it finally goes on the stack.
Once you finish all your "adjustments", yes, the opponent can kill or bounce the Spirit, negating all the damage and making you waste mana.