Tax relief is a policy or a program put in place to reduce the tax paid by businesses and individuals.
These programs are available to both individuals and businesses; however, the program one qualifies for depends on various factors, including their status with the IRS.
Do you have back taxes? Don’t worry; you have plenty of tax relief options you can use to unburden yourself from tax pressure. Those who are up to date with their taxes also have the means to lower their tax bill. So,
How does tax relief work?
The tax relief work by reducing your chargeable income, which determines the tax rate you will incur. By extension, this reduces the amount of tax payable by a taxpayer.
Remember, tax relief targets a specific group of taxpayers, for example, those who have incurred unexpected costs due to natural calamities like floods or hurricanes.
Tax relief comes in credits, exclusions, tax deductions, forgiveness on a tax lien, and payment plans. Let’s talk about each type of tax relief in detail.
Tax Deductions
Tax deductions are designed to help individuals or businesses reduce taxable income, thus reducing the amount of tax charged. Examples of individual deductions include;
- Work-related deductions – which may cover business expenses, business use of home & car, to mention a few.
- Education deductions include student loan interest, teacher educational expenses, and work-related educational expenses.
- Health care deductions – features premium tax credit and health coverage tax credit.
- Investments-related deductions may apply to capital losses, individual retirement arrangements, etc.
- Itemized deductions may cover charitable contributions, real estate tax, property tax, and gambling tax.
Single taxpayers qualify for a standard tax deduction of $12,400, while married couples qualify for $24,800 if they file jointly. Here is an example of how the standard tax deductions work for your better understanding.
For instance, if you are going to file $65,000 as a single person this year and qualify for a $12,400 tax deduction.
Without the deductions, you’ll be paying $14,300 in tax. But with tax deductions, your taxable income is reduced from $65,000 to $52,600.
This would mean that you will be taxed $11,572 (assuming you are on the 22% tax bracket). You will end up saving up to $2,278 due to tax deductions.
Tax Debt Forgiveness
It is a program by the Internal Revenue Service that provides taxpayers with several options to offset their tax debts.
The program was launched in 2011 as a tool to help struggling individual and businesses taxpayers settle their tax debts for less than the total amount owed.
The program has since been improved and expanded to adopt more flexible offer-in-compromise terms.
Tax Credits
Another form of tax relief you can make good use of is tax credits. This form allows you to save more money than tax deductions. Here tax credit is directly subtracted from total tax payable minus all the deductions.
Here is an example to help you understand better. If after taking the standard deductions from your taxable income, your payable tax amounts to $5,000. If you also qualify for a tax credit of $ 1,200, your final tax bill will be $ 3,800.
Tax Exclusions
Tax exclusion is where a taxpayer is permitted to leave out an entire income stream from taxable earnings; this reduces the total taxable income, thus the amount of tax you pay.
Tax exclusion may include things like;
- Disability payments
- Income earned in foreign countries
- Housing subsidies
Installment Agreement Plans
It refers to an agreement between the taxpayer and the IRS designed to allow taxpayers to repay their overdue debt over a more extended period than usually would take.
With installments agreements come three options;
1. Short term payment plan
This plan gives you a grace period of 3 months. It only applies to individual taxpayers who owe $ 50 000 or less—no fees charges.
2. Long term payment plan options 1
This payment plan applies to both individual taxpayers and businesses. There is a $31 to $ 107 fee. Individuals owing $ 100,000 or businesses with $ 25,000 in tax arrears are eligible to apply for this plan.
3. Long term payment plan option 2
It’s similar to long-term payment option 1, only that this one has more payment options (money order, credit/debit & monthly payment from a bank). It involves a set-up fee of $149 to $225.
How does an installment agreement plan work? If you had a debt of $ 20,000, you could enter into an agreement with the IRS for an installment agreement of, say, four years. This will allow you to repay your debt with a monthly payment of $ 500.
Should You Work With Tax Relief Companies?
The IRS has made all its tools and forms accessible to the public. You can easily get in touch with the agency via a phone call or their website.
The process can be complex and challenging, encouraging many to seek professional help. There is where tax relief firms come in. They act as an intermediary between the IRS and the taxpayer.
So, how do they work? It’s simple; these firms advertise themselves as the saviors to the taxpayers in distress.
They claim that they can eliminate if not reduce the tax debt owed by an individual applying for the relevant hardship programs. Often they will charge a high upfront fee before rendering the services.
What innocent taxpayers don’t know is that most of them don’t even qualify for the programs advertised by these companies.
As reported by victims, these firms at times don’t even make the effort of sending the required paperwork to the IRS. To make the matter worse, some companies don’t refund the payment.
In the end, the taxpayer is left with even more debt. Still, the question remains, is it worth it to apply for a hardship program through these tax relief companies?
Suppose you are having trouble settling your bills. You are better off negotiating for a payment plan directly with your creditor than expensively paying a company to negotiate a plan on your behalf.
Here Are Some Reasons You Need To Avoid Tax Relief Firms
As you might already know, not all of them will help you apply for tax relief successfully. We have gathered some reasons why we think you need to avoid some of these firms.
They charge expensive fees
The bottom line is these firms are business-oriented. They may claim that they want to help you handle your tax situation smoothly, but they are also motivated by the profits that come with it.
There are many cases where individuals claim to be charged notoriously high upfront fees. And this is even without a guarantee that your process will be successful.
Some even go to the extent of charging member continuation fees which is ridiculous. They only do this when they know they have you by their hook.
What about the ‘research’ fees? They will charge you investigation fees to find information like when your taxes will expire. Of course, this is something you could do on your own without costing you a penny.
Some use manipulation tactics
Many individuals who have interacted with some of these firms will agree that they don’t give the best advice.
Keeping in mind that it is also a business to them, they are likely to suggest options that will give them a better return in terms of profits.
Some employ the oldest tricks by bluntly telling a distressed taxpayer that he/she qualifies for a specific hardship program, yet they know very well that is not the case. All they are looking for is to cash in their money.
Many people fall into these traps because of big promises and assurance of a tax-stress-free tomorrow.
A good number of them are running out of business
Statistics show that over 100 tax resolution companies have gone out of business.
Such companies rely on salesperson employees. If their employees can’t find new clients to recruit, that means the end of the business.
Please bear in mind that not all tax relief companies are bad. Some companies conduct genuine businesses of helping fellow Americans cope with tax burdens by applying for tax hardship programs.
Conclusion
With tax relief programs put in place by the IRS, many Americans can live a normal life with less stress due to the tax burden.
There are plenty of tax relief options to choose from depending on your status with the IRS and whether you meet the basic requirements or not.
While tax resolution firms exist to help you with your tax burden, you are better off negotiating your tax relief options with your creditor directly.
