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The annual tax deadline comes and goes with each year, but no matter how ready you are to file, nothing prepares you for dealing with an insurmountable tax bill. The good news is, there are ways you can reduce your tax liability before you submit your return, as well as tax debt relief strategies to help you manage and recover from tax debt.
In this post, we’re deep-diving into tax relief; what it is, who’s eligible, and what tax relief programs are out there to help you minimize the impact annual taxes have on your budget and lifestyle. Use the links below to navigate throughout the article, or read all the way through for a comprehensive overview of tax relief.
Tax deductions can be used to relieve taxes by lowering your total liability before you even get your tax bill. The federal government, many states, and several local governments offer tax deduction opportunities to individuals and businesses looking to reduce what they pay in income taxes. Here’s how it works.
Each tax year, the IRS assesses how much you owe in taxes based on your annual income and filing status. Typically, the more money you make, the more aggressively your income is taxed. In an effort to give taxpayers a break, the IRS offers a few opportunities for businesses and individuals to save money, tax deductions are one example of this type of tax relief. Tax deductions save taxpayers money by reducing their taxable income—the number that determines your tax rate according to your income bracket—and therefore, how much money you owe in income taxes.
There are two different types of tax deductions available to taxpayers: standard and itemized deductions. Both serve the same purpose, providing tax relief by reducing total liability, but they go about it in different ways.
Tax credits are often confused with tax deductions, and while they both offer tax relief help, there are several differences between tax credits and deductions. The main difference between the two is how they actually save taxpayers money. Whereas tax deductions reduce one’s total taxable income, tax credits reduce a taxpayer’s tax bill, dollar-for-dollar.
This means that if you claim a tax credit worth $2,000, your tax bill would be directly lowered by $2,000. Tax credits offer substantial savings to many qualifying taxpayers, and there are many you may be eligible to claim. Some examples include:
Tax Exclusions
For the most part, the IRS wants to maximize the amount of taxes you pay based on your income, but there are certain exceptions that allow taxpayers to exclude some of their income to minimize how much of their income is subject to taxes. Taxpayers can take advantage of the tax relief offered by exclusions in addition to deductions and credits because they reduce tax liability in different ways. More specifically, tax exclusion lowers your adjusted gross income before you even get to claim deductions or credits.
Some of the most common income tax exclusions are:
Tax debt relief refers to the methods that the IRS and professional tax services offer to make resolving tax debt more manageable. There are several ways tax debt relief can occur, such as enrollment in the IRS Fresh Start Initiative, payment through an installment plan, and negotiating an Offer in Compromise. Our team is well-versed in these tax relief solutions and ready to find the right course of action for your situation.
In this next section, we’ll discuss the ins and outs of tax debt relief, who qualifies, and how we can help.
By taking action and using tax debt relief solutions, you can minimize the stress and financial strain of owing the IRS.
Negotiating an OIC can be a challenging task to accept on your own, but with the support of our team, we can guide you through the entire lifecycle of qualifying for a tax debt relief solution, to freeing yourself from tax debt entirely!
- What is Tax Relief?
- When Tax Relief is an Option
- Types of Tax Relief
- Who is Eligible for Tax Relief?
- Tax Debt Relief Programs & Solutions
- The Cost of Tax Relief
- Tax Relief for State and Local Taxes
- Working with a Tax Debt Relief Company
What is Tax Relief?
Tax relief aims to reduce the amount that an individual taxpayer or business may owe in taxes to the IRS, and sometimes, local and state tax agencies. There are several approaches to tax relief that can be leveraged either while you’re filing, or as a reactive measure if you find yourself in tax debt. Deductions, credits, exclusions, and IRS tax debt relief programs are all examples of tax relief. The first few can reduce your tax bill before you receive it, while debt relief addresses tax liability after your bill is past due. We’ll dive into how each of these strategies work a little later on in this post (click here to jump ahead). Depending on which tax relief strategy you’re using, you may be able to do it on your own, or you may prefer to have the support of a tax professional to help you navigate through the process.When Tax Relief is an Option
Most taxpayers are eligible for some form of tax relief, whether it’s taking standard or itemized deductions, claiming tax credits, or enrolling in an IRS tax debt relief program like the Fresh Start Initiative. If you’re unsure if tax relief is an option for you, contact us for your free tax consultation. During your consultation, we’ll learn more about your finances and assess your situation. From there, our tax team can help you explore and execute on the best tax relief solution for your needs.Types of Tax Relief
As we mentioned, there are several ways that the IRS offers tax relief to eligible taxpayers. Some tax relief methods can lower your tax liability from the moment you file, while others are targeted toward tax debt relief after a bill is marked as overdue. Let’s dive into what tax relief methods are out there, and how you can use each to your advantage.Tax Deductions
Tax deductions can be used to relieve taxes by lowering your total liability before you even get your tax bill. The federal government, many states, and several local governments offer tax deduction opportunities to individuals and businesses looking to reduce what they pay in income taxes. Here’s how it works.
Each tax year, the IRS assesses how much you owe in taxes based on your annual income and filing status. Typically, the more money you make, the more aggressively your income is taxed. In an effort to give taxpayers a break, the IRS offers a few opportunities for businesses and individuals to save money, tax deductions are one example of this type of tax relief. Tax deductions save taxpayers money by reducing their taxable income—the number that determines your tax rate according to your income bracket—and therefore, how much money you owe in income taxes.
There are two different types of tax deductions available to taxpayers: standard and itemized deductions. Both serve the same purpose, providing tax relief by reducing total liability, but they go about it in different ways.
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- Standard Deduction: The standard deduction is a set deduction amount that lowers your taxable income by a set numerical value, so long as your income is lower than the maximum earning threshold. Incomes that exceed the maximum are phased out, meaning that these taxpayers don’t qualify for the standard deduction. The IRS calculates each tax year’s standard deduction value and income requirements based on filing status and inflation, so it typically changes on an annual basis.
- For 2019 taxes, filed in 2020, the standard deduction amounts are:
- Single filers, Married filing separately: $12,200
- Married filing jointly: $24,400
- Head of household: $18,350
- Most taxpayers are entitled to the standard deduction, but there are a few restrictions. You will not be able to claim the standard deduction if you are:
- A married individual filing as married filing separately whose spouse itemizes deductions
- An individual who was a nonresident alien or dual status alien during the year (see below for certain exceptions)
- An individual who files a return for a period of less than 12 months due to a change in his or her annual accounting period
- An estate or trust, common trust fund, or partnership
- For 2019 taxes, filed in 2020, the standard deduction amounts are:
- Standard Deduction: The standard deduction is a set deduction amount that lowers your taxable income by a set numerical value, so long as your income is lower than the maximum earning threshold. Incomes that exceed the maximum are phased out, meaning that these taxpayers don’t qualify for the standard deduction. The IRS calculates each tax year’s standard deduction value and income requirements based on filing status and inflation, so it typically changes on an annual basis.
- Itemized Deductions: Unlike the standard deduction which is a set reduction in taxable income, itemized deductions are claimed and calculated individually, each with their own value and criteria for eligibility. Common examples of itemized deductions are charitable contributions, medical expenses, self-employment deductions, and the home mortgage deduction.
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- Each itemized deduction has its own criteria for eligibility, detailed on the description of the deduction.
- Taxpayers must provide proof of each deducted expense and retain these records for seven years in the event of an IRS audit. Claiming false deductions can result in a number of capital and criminal consequences.
Do states offer tax deductions?
It depends! Several states that collect income taxes also offer tax deductions that taxpayers can leverage to reduce the amount they owe in state taxes. Some states, like California, even use the same standard deduction and itemized deduction structure that the IRS employs. However, not all states collect income taxes, so if you’re lucky, you might only be liable for federal income taxes. Check your state’s tax code with our state income tax calculator. Keep in mind, if you’re claiming itemized deductions (on your state or federal taxes), you’ll want to have sufficient proof of the deductions you claim in case the IRS decides to conduct a tax audit. Claiming false deductions can result in a number of capital and criminal consequences. Not sure which deduction strategy makes the most sense for you? Learn about standard and itemized deductions here.Tax Credits
Tax credits are often confused with tax deductions, and while they both offer tax relief help, there are several differences between tax credits and deductions. The main difference between the two is how they actually save taxpayers money. Whereas tax deductions reduce one’s total taxable income, tax credits reduce a taxpayer’s tax bill, dollar-for-dollar.
This means that if you claim a tax credit worth $2,000, your tax bill would be directly lowered by $2,000. Tax credits offer substantial savings to many qualifying taxpayers, and there are many you may be eligible to claim. Some examples include:
- The Earned Income Tax (EIT) Credit, which provides tax relief based on your income earned.
- The American Opportunity Credit, which accounts for a percentage of expenses associated with higher education.
- The Child and Dependent Care Credit, which offers a tax break based on the number of children and dependents cared for.
- The Health Coverage Tax Credit, which provides tax relief for older Americans with healthcare expenses.
- The Residential Energy Efficient Property Credit, which rewards taxpayers who have installed alternative energy solutions in their home.
Do states offer tax credits?
Several states offer tax credits that can be applied to taxpayers’ annual returns. Note: Both tax deductions and credits are claimed using the standard IRS 1040 Form. Holding onto receipts is critical if you intend to claim any itemized tax deductions or tax credits on your annual return. Having this documentation at the ready is immensely helpful if you find yourself getting audited by the IRS. Whether or not you’re prepared for an audit, our team offers professional tax audit help to guide you through the process to get the best possible outcome for your situation.Tax Exclusions
For the most part, the IRS wants to maximize the amount of taxes you pay based on your income, but there are certain exceptions that allow taxpayers to exclude some of their income to minimize how much of their income is subject to taxes. Taxpayers can take advantage of the tax relief offered by exclusions in addition to deductions and credits because they reduce tax liability in different ways. More specifically, tax exclusion lowers your adjusted gross income before you even get to claim deductions or credits.
Some of the most common income tax exclusions are:
- Income from life insurance death benefits
- Child support
- Welfare
- Municipal bond income
Tax Debt Relief
Tax debt relief refers to the methods that the IRS and professional tax services offer to make resolving tax debt more manageable. There are several ways tax debt relief can occur, such as enrollment in the IRS Fresh Start Initiative, payment through an installment plan, and negotiating an Offer in Compromise. Our team is well-versed in these tax relief solutions and ready to find the right course of action for your situation.
In this next section, we’ll discuss the ins and outs of tax debt relief, who qualifies, and how we can help.
Who is Eligible for Tax Relief?
Because there are so many tax relief methods taxpayers can leverage, there’s almost always a tax relief strategy for everyone. Credits, deductions, and exclusions offer several opportunities for US taxpayers to catch a break on their annual income taxes, while tax debt relief solutions are designed to help those who find themselves in hot water with the IRS. If you’re unsure if any of these tax relief methods can be applied to your situation, we’re here to help! With decades of combined experience helping taxpayers stay in good standing with the IRS, our team is ready to find the best course of action for your needs.Who is Eligible for Tax Debt Relief?
Eligibility for IRS debt relief depends on what type of assistance your circumstances require. The IRS offers several opportunities for taxpayers to resolve their tax debt, but each comes with its own set of criteria. For example, to qualify for the IRS Fresh Start program, the taxpayer cannot owe more than $50,000 and they may not earn more than $100,000 per year as a single filer, or $200,000 for filers that are married, filing jointly. We’ll talk more about specific tax debt relief eligibility requirements when we discuss tax debt relief programs and solutions.Why is Tax Debt Relief Important?
Failing to pay your taxes can potentially lead to criminal and capital penalties later on down the road. Late payment penalties and interest fees can also worsen your tax burden over time, making recovery feel nearly impossible.
By taking action and using tax debt relief solutions, you can minimize the stress and financial strain of owing the IRS.
Tax Debt Relief Programs & Solutions
Being indebted to the IRS can be a stressful, frustrating, and financially draining experience, but there are several tax debt relief programs and solutions you can employ to restore your clean slate. In this section, we’ll cover the IRS-sponsored programs and tactics the Community Tax team uses to help taxpayers recover from tax debt.IRS Fresh Start Initiative
If you find yourself in debt to the IRS, the Fresh Start Initiative can help you get back on your feet. The Fresh Start Initiative was first launched in 2011 as a way to make it easier for taxpayers to settle up their debt with the Internal Revenue Service. There are several methods that the program employs to accomplish its goal of a “fresh start” for all taxpayers.- One way is by allowing taxpayers to set up installment agreements that make paying a balance more manageable over time, rather than requiring them to pay the amount in full. However, setting up an installment agreement with the IRS isn’t always a straightforward process. Our team is well-versed in the inner workings of IRS procedures, and we’re happy to help you negotiate the best repayment terms to relinquish your tax debt once and for all.
- Another possibility within the Fresh Start Initiative is to secure an Offer in Compromise (OIC) which ultimately reduces the amount of taxes you owe to the IRS. We’ll talk more about this option in the next section.
- The last component of the Fresh Start Program includes the ability to file for a tax lien withdrawal. A federal tax lien gives the federal government the authority to seize your property or other assets in order to resolve your tax debt. By filing for a tax lien withdrawal, you can potentially have a lien removed, provided that you meet certain requirements. Additionally, the Fresh Start Initiative also increased the amount a taxpayer must owe before they’re served with a tax lien.
How do you qualify for the Fresh Start Initiative?
The IRS has several restrictions for who is and isn’t eligible for the Fresh Start Program:- Self-employed taxpayers must demonstrate proof of a 25 percent decrease in net income
- Individual taxpayers cannot earn more than $100,000 per year (or $200,000 for married couples filing jointly)
- The tax debt in question must be below $50,000 by the end of the tax year
Offer in Compromise
An Offer in Compromise (OIC) is one of the most effective ways to settle up tax debt. This solution allows taxpayers to resolve tax debt for less than the original balance owed. To qualify for an OIC, taxpayers must demonstrate that they are unable to pay the full balance, are not liable for the amount due, or that paying the entire balance would result in financial hardship. How is an Offer in Compromise paid? There are three ways that taxpayers can pay off their balance with an OIC agreement:- Lump sum payments must be paid off in five installments.
- Short-term periodic payments must be paid off within 24 months.
- Deferred periodic payments must be paid within the statutory period agreed upon.
Negotiating an OIC can be a challenging task to accept on your own, but with the support of our team, we can guide you through the entire lifecycle of qualifying for a tax debt relief solution, to freeing yourself from tax debt entirely!
IRS Repayment Plan (Installment Agreements)
If you owe back taxes to the IRS but are unable to pay off the balance in full, you may qualify for a special repayment plan that makes resolving your tax debt much more feasible. Installment agreements simply break down your total balance into manageable monthly payments spread out over time, typically over a period of 72 months. In certain circumstances, the IRS may eliminate late payment and interest penalties as part of the installment agreement. To qualify for an installment agreement, taxpayers must meet the following criteria:- Owe less than $50,000 in back taxes (including interest and penalties)
- Filed all required tax returns for current and previous tax years
- Any tax refund you receive while the installment agreement is in place will be applied to your balance
- A startup fee of $120 is required of all taxpayers upon approval
- Small businesses with tax debt may qualify for an In-Business Trust Fund Express installment agreement if they owe less than $25,000 in payroll taxes and have filed all required returns
- Not all installment agreement requests are approved
- There are incorrect details on the Collection Information Statement (Form 433-A)
- The IRS classifies your living expenses as unnecessary or extravagant
- You’ve already defaulted on a previous installment agreement
Can an installment agreement be revoked?
Yes. Once your installment plan has been approved, it’s important to keep up with your payments and make sure that they’re on-time, every time. The IRS could revoke the agreement if you’re not abiding by the terms agreed upon. Additionally, an installment agreement can be terminated if you fail to file your future returns or if the IRS determines that you provided inaccurate or incomplete information on your request.Currently Not Collectible
The least common opportunity for tax debt relief is having tax debt labeled as “Currently Not Collectible” (CNC). This doesn’t occur too often, but when it does, it’s a hugely effective form of tax relief. To be considered for CNC status, a taxpayer must be able to demonstrate financial hardship that makes paying off their tax debt impossible. To determine financial hardship, the IRS will compare a taxpayer’s total income compared to the national and local average of living expenses. Applying for CNC status can be a lengthy process because the IRS requires so much information to evaluate your financial situation. Documents needed to apply include:- List of all income and expenses
- All assets
- Bank statements from the previous 3 months
- Proof of out of pocket medical expenses paid
Penalty Abatement
Being in debt with the IRS is already stressful enough, but to add insult to injury, you could also face a number of penalties in response to your unpaid balance. For many taxpayers, this added expense can make resolving tax debt seem like an unlikely reality. However, many taxpayers don’t realize that these fines may be removed with the right penalty abatement strategy, carefully guided by a tax professional. With proof that payments have been missed due to reasons beyond your control, you may be able to minimize your debt and work toward a zero balance sooner than later.The Cost of Tax Relief
The cost of tax relief entirely depends on your tax situation; some tax relief methods are easily applied, while others require more strategy and finesse. No matter how severe your situation is, our team is committed to finding you the most efficient and economical solution for your needs. What’s more, Community Tax offers free tax consultations that aim to point you in the right direction of relief, ASAP.Tax Relief for State and Local Taxes
State tax agencies have differing income tax regulations than those set by the Internal Revenue Service. Federal and state governments are entirely different entities, so knowing their differences is important to understanding how tax relief solutions can be applied in each case.- Federal taxes are collected by the Internal Revenue Service and are used to support federal infrastructure and programs, including, Social Security, defense, safety net programs, and federal health insurance organizations.
- State taxes are regulated and collected by the state tax bureaus, and their funds go toward state-run programs such as education, transportation, corrections, and public help organizations. Some states collect income taxes while others such as Alaska, Florida, and Texas, do not.
- Local taxes are collected by local municipalities toward services such as road maintenance, garbage collection, education programs, and health services. Local taxes typically come in the form of property and sales taxes, but some local jurisdictions collect local income taxes, as well.
Working with a Tax Debt Relief Company
Finding relief from tax debt can be a difficult task to undertake on your own, especially if you’re already busy juggling all of your other personal and financial responsibilities. The last thing you want to add to your plate is making time to interpret complex IRS tax code and processes to resolve your tax debt. And if your situation is uniquely complicated, you could be up against a brutal battle with the IRS. However, not taking action can result in much graver consequences, such as aggressive interest, collections measures, and even criminal charges. Here’s where working with a company that specializes in tax debt relief could work in your favor:- Our team quickly identifies the best tax relief option for you, eliminating the need for hours of self-directed research and considering pros and cons.
- Resolve your tax issues in a timely manner, without having to stay on hold with federal and state tax bureaus.
- Together, we can expedite the process by helping you gather the documents you need to apply for the appropriate tax relief solution for your needs.
- Thanks to our experience negotiating with the IRS, we’re confident in our ability to secure the best possible outcome for your situation.
How to Choose the Right Tax Debt Relief Company
Whenever you’re looking for support managing your finances, you want to find a company that is experienced, trustworthy, secure, and has a track record of demonstrated success. Community Tax checks each of those boxes. Our expertise comes from our experience—we’ve helped over 70,000 clients with their tax needs since 2010. The Community Tax team has secured hundreds of approvals for Offer in Compromise agreements, installment plans, and CNC status, the reviews from our customers say it all. By preparing your taxes accurately and efficiently from the start, we make sure that you’re in a good position with the IRS and your personal finances. And if you find yourself in an unfavorable situation with the Internal Revenue Service, we’re fully prepared to turn every stone until we find the best option for your circumstances. In addition to providing tax debt relief help, we’re proud to offer these additional accounting and tax services:- Tax Lien Help
- Negotiate Payroll Taxes
- Tax Resolutions
- Offer in Compromise
- Tax Penalties & Interest
- IRS Audit Defense
- Income Tax Preparation
- Stop Wage Garnishment
- Prevent Levy & Seizure
- Tax Extensions
- Custom Tax Solutions
What Does the Tax Debt Relief Process Look Like?
To begin the tax debt relief process, we’ll first go through a free tax consultation, which you can request using this online form, or by phone. During the consultation, we’ll be able to get a better understanding of your situation and provide you with pricing and process information. From there, we’ll work together to get the necessary paperwork and details we need to employ the best tax debt relief solution for your circumstances. Once that’s complete, we can get to work applying for the most fitting tax relief option for you. Though the process may take some time and negotiation, we’re confident that our team can find the most opportune outcome possible. After negotiation with the IRS is complete, you may need to continue to make payments to resolve your remaining balance. To make this as straightforward as possible, we’ll walk you through the process to ensure that you’re aware of the conditions of the agreement and are set up for success moving forward.Wrapping Up
- Tax relief refers to the strategies taxpayers can use in order to reduce their overall tax liability by:
- Claiming tax deductions and credits
- Identifying exclusions
- Taking tax debt relief measures as needed
- Tax debt relief helps taxpayers who owe taxes to the IRS or state governments by setting up payment plans, reducing their tax balance, or enlisting in IRS tax debt relief programs.
- Tax debt relief is a practical option to consider for taxpayers who are behind or otherwise unable to pay off their tax debt.
- Some tax debt relief measures include:
- Filing for an Offer in Compromise
- Setting up an installment agreement
- Enrolling in the IRS Fresh Start Initiative
- Obtaining Currently Not Collectible Status
- Penalty abatement
- Working with a professional and experienced tax debt relief company can speed up the process and help you secure the most favorable solution.
