Tax Relief Overview

Imagine this: you’ve spent the entire year working hard, putting in extra shifts, and devoting your heart and mind to your profession. But when you pick your paycheck, you notice that a considerable chunk has been deducted in the name of taxes. It might be upsetting to just watch as your hard-earned money slips into the hands of the government. Well, this is where tax relief comes in.

Tax relief initiatives aim to alleviate the tax burden on taxpayers and businesses altogether, affording them more financial breathing room and flexibility. In simple terms, tax relief—be it in the form of a deduction, exemption, or credit—can substantially impact your financial position.

So, let’s take a detailed look at tax relief and see how you can leverage it to keep more money in your wallet.

Forms of Tax Relief

As the introduction mentions, tax relief comes in various forms: tax deductions, tax exemptions, and tax credits. Let’s look at each in detail.

Tax Deductions

Tax deductions help you reduce your total taxable earnings and, consequently, the owed taxes on your income.

Tax deductions are available for a diverse range of things, such as:

• Property taxes paid on your properties 
• Interest paid on a student loan or mortgage
• Work-related or business expenses
• Health insurance premiums
• Sales taxes
• Donations to charities

There also exists a standard tax deduction available to all taxpayers. That is, $12,400 for individual filers and $24,800 for spouses filing jointly. (You cannot claim these if you claim the tax deductions outlined above).

Tax Exemptions

Like tax deductions, tax exemptions enable you to lower your taxable income. The only distinction between the two is that exemptions allow you to exclude a whole revenue stream from your earnings.

Company-sponsored healthcare plans are an excellent example. Despite often being regarded as a “benefit” and a portion of your employee remuneration, the costs borne by your company do not qualify as taxable income. That said, such plans are one of the most prevalent tax exemptions.

A few other examples of tax exemptions include:

• Disability payments
• Housing or rent subsidies
• Some income types earned in foreign countries
• Natural disaster relief payments 

Tax Credits

Tax credits differ slightly from tax deductions. They decrease your actual tax bill — the annual taxes owed to the IRS — rather than your taxable income.

If you have a child and cut it for the dependent tax credit, which equals $2,000 per child, you would be allowed to deduct that amount from your total tax bill. For instance, suppose you owe the government $8,000 in taxes for the year; the credit will cut that to $6000, allowing you to realize significant savings.

Here are other situations that qualify for tax credits:

• Having a child or another type of dependency
• Adopting a child within that fiscal year
• Childcare expenses
• School-related costs
• Being handicapped or elderly
• Setting up a solar energy system
• Contributing towards a retirement plan

Major Tax Relief Options

The IRS Fresh Start program assists individuals in keeping pace with their unpaid taxes and avoiding wage garnishments, bank levies, tax liens, and jail time. The program is a set of improvements to the United States tax code responsible for optimizing the tax collection process. It allows taxpayers and businesses to settle their tax liabilities for much less than the total owed amount. 

The following tax relief options are ideal for individuals and businesses with overdue tax payments.

Offer in Compromise

An “offer in compromise” or OIC is one of the most prevalent ways you can leverage to get tax relief. This arrangement allows you to settle your IRS back taxes for less than you initially owed. Taxpayers are typically advised to seek this if they cannot resolve their tax liability or if doing so will leave them in financial peril.

Sounds great, right? However, convincing the IRS to consent to an OIC is arguably far more difficult than setting up a payment plan. In fact, according to the 2021 IRS Data Book, the bureau rejected 34,131 offers out of 49,285; only 15,154 were accepted.

Installment Agreement

An IRS installment plan allows you to pay your outstanding taxes through monthly installments over a specified period. Nonetheless, penalties and interest may keep accruing until your debt is settled in full.

Penalty Abatement

The IRS could waive or reduce penalties from your debt; however, you’ll first need to provide a valid reason for failing to pay your taxes on time. Some justifiable grounds include the following:

• Natural calamities, fires, and other disruptions
• The taxpayer’s or an immediate relative’s incapacity, severe sickness, or death
• Difficulty in acquiring tax-related documents. 

Point to note: As specified by the IRS, “a lack of funds, in and of itself, is not reasonable cause for failure to file or pay on time.”

Currently Not Collectible

If you’re struggling to pay your living expenses and taxes (within reason), the IRS can assign you a “Currently-not-collectible” status.  To be considered for this tax relief, you must submit a Collection Information Statement for Wage Earners and Self-Employed Persons to the IRS. You’ll be required to provide evidence of your financial distress in these forms and let the IRS review them.

However, before leveraging the “currently-not-collectible” status, you must understand the following:

• It is only a short-term solution; the IRS will examine your annual revenue to determine whether your financial condition has improved.
• Being granted this status doesn’t remove your tax liability; it just postpones it.
• You may still be subjected to a tax lien.

Discover the Best Tax Alleviation Option for You

As mentioned, taxpayers and businesses can leverage much-needed financial support from tax relief programs.

Nonetheless, all these initiatives function differently, and picking out the most suitable for your situation isn’t as straightforward. And let’s not even start on how arduous it can be to navigate the various involved processes. 

This is why it’s prudent to consult a tax professional to help sort out your tax needs. At Cumberland Law Group, we boast a team of seasoned tax attorneys willing to provide professional guidance and help you discover the ideal tax solutions for you or your business. So, contact us today and let us help.