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Being saddled with major tax burdens is no fun, and as we've all learned, there is absolutely no way to avoid taxes. There are, however, ways to reduce tax liability so the final bill isn't so overwhelming. Some of these apply to general tax filing and how taxpayer liability is calculated, while others apply to situations in which back taxes are owed. Here we look at a number of effective tax relief options that apply to both scenarios.
A tax deduction is a way to reduce your tax liability by deducting the amount of money you paid for something from your total taxable income. There are multiple items that can be claimed as tax deductions, one example being any business or work-related expenses that you incurred. These could include things like office supplies or software and computer upgrades you purchased for work.
To illustrate, let's say you earn $60,000 in annual salary and spend $5,000 in business expenses during a taxable year. Your taxable income would then be $55,000 instead of $60,000, and you would pay income tax according to your bracket based on that reduced taxable income figure. There are deductions like this for things like interest paid on mortgage or student loans, property tax payments, charitable donations, and health insurance premiums.
Tax credits will also reduce your tax bill, but they are a different form of tax relief. While tax deductions reduce your taxable income, tax credits are actually discounts that are applied to the amount of tax you owe the government. Again, there are multiple examples of tax credits, and one of the more common among these is the dependent tax credit.
This applies to taxpayers who care for eligible children and other dependents, and the tax credit amount is subject to change. If we use the example of a $2,000 tax credit, this would mean a person who owes $10,000 in tax but has one dependent child would only owe $8,000. Other tax credits include being elderly or disabled, payment for school-related expenses, contributions to a retirement plan, and installing a solar energy system in your home.
Tax exclusions are portions of a person's income that can be excluded from their total taxable income, thereby reducing tax liability. One common example of this is when a company pays for a portion of an employee's healthcare through a group plan. While this may be considered a benefit that is part of the employee's pay, this portion of healthcare that the company pays for is not considered taxable income for that employee.
Other examples of tax exclusions include certain types of income that were earned in other countries, disability payments, rent payments, and expenses related to natural disaster relief.
This is one of the first options to consider for those with unpaid taxes from previous years who can't afford to pay them right away. The IRS has a program that allows taxpayers to establish an installment plan where the tax bill can be spread out over time. The taxpayer will have to pay interest and associated fees, but it does provide more time to pay taxes and this is sometimes all that is needed.
There are two types of IRS payment plans available – short-term and long-term. The short-term plans go up to 120 days, while long-term plans can be spread out even longer. There are specific conditions under which taxpayers are eligible to qualify in each case, including the amount owed in combined tax, penalties, and interest. Payments can easily be set up as automatic withdrawals from a bank account.
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An offer in compromise may be an option for tax relief if you absolutely cannot pay your tax debt, or if doing so would create a financial hardship. In essence, it allows taxpayers to settle back taxes by paying less than the total amount they owe. It is not easy to qualify for this option, as the IRS rejects the majority of these requests.
When considering offers in compromise, the IRS considers things like the taxpayer's total assets, income, and expenses to determine their overall ability to pay. There is a non-refundable fee to apply for this relief, and initial payment must be made as well. Additionally, applicants must be up to date in filing tax returns, and anyone in an open bankruptcy proceeding will not qualify. Once an application is filed, the IRS will suspend any collection activities.
If tax bills go unpaid for a long period of time, penalties, administrative fees, and other associated high-interest costs can really begin to add up. Fortunately, there is an option to have these penalties forgiven if certain conditions apply to your situation. Basically, there needs to have been what the IRS considers “reasonable cause” that prevented you from paying your taxes on time, and you'll have to demonstrate this to them.
Some examples of reasonable cause include a death in the family, a house fire, or some sort of natural disaster. It's best to check with a local tax specialist if you feel you have a situation that might qualify for penalty relief.
This is another form of relief that may be available to those who owe tax but suffer from financial hardship. If your living expenses make paying your taxes unrealistic, you may request that the IRS place your account in what is called Currently Not Collectible status. This is a temporary measure that can delay payment, but your tax burden does not go away.
Anyone who applies may be asked to complete a form called a Collection Information Statement that proves financial hardship. The form requires information such as monthly income and expenses, and even if you are approved the IRS may review your situation each year to determine if your financial standing has improved to the point where you should be paying your taxes. Even with this status, tax liens may still be filed against you.
Many married couples file their tax returns jointly to take advantage of the multiple financial benefits. One drawback to this is if one partner makes a mistake in filing that results in additional tax being owed in later years, the additional tax burden applies to both partners, even if they are no longer married. This can be unfair to an innocent spouse who had no responsibility for the improper tax filing, hence this provision for innocent spouse relief.
If you request and receive this relief, you will no longer be responsible for any tax debts, penalties, or fees related to the joint tax returns on which your spouse either omitted or improperly reported relevant information. It's important to note that innocent spouse relief will only apply to individual income or self-employment taxes.
These are some of the most common forms of relief that are available to taxpayers, both for limiting liability when filing your tax returns and for resolving situations where you owe money for unpaid back taxes. Contact Tax Alliance in Santa Ana, CA today to help remove the stress of tax management and get the relief you need.
Because of advancements in our technology, we are able to communicate with the IRS electronically, its as if we are in the same office! Faster service and more cost effective!
If you are not happy with our tax services within the initial 21 days, we will give you a 100% refund of services rendered, no questions asked!
You find it, we will match it! Tax Alliance will match and beat (by 10%) any competitive offer. Contact our office today and receive a free no obligation tax consultation.
Because of advancements in our technology, we are able to communicate with the IRS electronically, its as if we are in the same office! Faster service and more cost effective!
If you are not happy with our tax services within the initial 21 days, we will give you a 100% refund of services rendered, no questions asked! We help our clients nationwide!
You find it, we will match it! Tax Alliance will match and beat (by 10%) any competitive offer. Contact our office today and receive a free no obligation tax consultation.
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