Tax Relief

Tax Relief
Tax relief refers to any reduction in the taxes owed by a taxpayer. These reductions are granted by the government and can include write-offs, credits and tax-breaks.

What is Tax Relief?

Tax relief refers to any reduction in the taxes owed by a taxpayer. It can mean a smaller amount is owed, a greater amount is refunded, or the extension of a deadline.1

How does Tax Relief work?

Taxes are raised by the government to pay for services. Taxes are paid on the property, purchases, and other financial transactions. The largest single source of tax revenue in America is income tax, which is collected as a percentage of an individual’s income. Tax relief is a broad term referring to a reduction in taxes paid. One common form of tax relief is accomplished by lowering the amount of income that’s subject to taxation. That allows a person to pay taxes as though their income is smaller than it actually was.

How does a tax write-off work?

A “write-off” allows you to avoid paying taxes on a certain portion of your income. Charity, business expenses, and many other kinds of payments can be written off and deducted from the money you have to pay taxes on. Imagine a person earned $40,000 one year and that income will be taxed at 20%. They would need to pay $8,000 in taxes. Now assume that they pay $5,000 in charity, and spend $5,000 on a business expense. By writing off those expenses, our friend will be taxed as though they only made $30,000, meaning they’ll pay $6,000 in taxes, saving $2,000. By keeping a close eye on your expenses, you might be able to significantly lower your tax bill.

How does a tax credit work?

A tax credit is a tax reduction, often granted to encourage certain behavior or purchases. Unlike a write-off, a tax credit does not affect the amount of income that is subjected to taxation. It is a deduction applied after the tax amount is already calculated. Tax credits might be refundable or nonrefundable. A refundable tax credit entitles the receiver to money in the form of a tax refund if it reduces their tax burden to less than zero. A nonrefundable credit will reduce the amount of taxes a company or individual pays but will not add to a tax refund.

What other tax breaks are there?

In addition to write-offs and tax credits, Congress may pass laws that reduce the tax rates, either overall or for specific groups. Sometimes these tax breaks are passed to help taxpayers deal with an economic downturn, while other times they might be passed in the hope that they’ll spur economic activity.

Who can qualify for Tax Relief?

Different forms of tax relief are granted to different sorts of people. Businesses and individuals are often able to access tax credits or write-offs based on certain behaviors. Anyone who is unable to pay their taxes due to bankruptcy or other reasons may be able to qualify for forms of tax relief. By contacting the Taxpayer Advocate Service, an independent organization inside the IRS, they can learn what options they have, like settling their tax debt for less than they currently owe.

What is the purpose of Tax Relief?

Tax relief can serve many different purposes. Not only can it be used as a form of government aid in the wake of a natural disaster like an earthquake or a tornado, but it can also be employed as an incentive.2 A tax credit for using sustainable energy is a form of tax relief, as is the child tax credit.

Anyone with a child may be eligible for a refundable tax credit if they meet certain criteria outlined by the IRS. The child must be under the age of 17, live with the person filing for the credit, rely on them as a dependent, and be a legal U.S. resident. Because the purpose of the tax credit is to help parents afford to care for their children, higher income parents qualify for smaller credits, with the benefit phasing out completely above a certain income level.3

In general, the government will often try to provide tax credits and other forms of tax relief to help lower-income Americans overcome financial hardship.

How can I find out if I qualify for Tax Relief?

IRS.gov the official website of the Internal Revenue Service, has a huge database of deductions and credits for which you may be able to qualify. If you use software like TurboTax, it will automatically walk you through possible deductions. You can also seek out accounting companies for assistance, but be careful.

What are Tax Relief companies?

There are many companies that use the phrase “tax relief” to advertise their services as intermediaries in settling a debt with the IRS. However, many of these companies are fraudulent and consumers should be wary of any firm advertising tax relief services. They’re unlikely to help you reduce your tax burden, and many of them won’t even try. What’s worse, is some of them might tell you they’re going to contact the IRS and then not do so, leaving you in legal trouble on top of your financial worries. Always try to work directly with the IRS to resolve your problems.4

For more information on tax relief companies and seeking relief from taxes owed to the IRS, consult this helpful guide from the Federal Trade Commission (FTC).

References

  1. “Tax Relief” Investopedia. Accessed February 3, 2016. https://www.investopedia.com/terms/t/tax-relief.asp
  2. “IRS Provides Tax Relief to Missouri Storm Victims; Tax Deadline Extended to May 16.” Internal Revenue Service. Accessed February 3, 2016 from a href=”https://www.irs.gov/uac/newsroom/irs-provides-tax-relief-to-missouri-storm-victims-tax-deadline-extended-to-may-16″ target=_blank”>https://www.irs.gov/uac/newsroom/irs-provides-tax-relief-to-missouri-storm-victims-tax-deadline-extended-to-may-16
  3. “Ten Facts about the Child Tax Credit” Internal Revenue Service. Accessed February 3, 2016 from a href=”https://www.irs.gov/uac/ten-facts-about-the-child-tax-credit” target=_blank”>https://www.irs.gov/uac/ten-facts-about-the-child-tax-credit
  4. Fuscaldo, Donna. “Don’t Become a Victim of a Tax-Relief Scam.” FoxBusiness.com. Accessed February 3, 2016 https://www.foxbusiness.com/features/2013/07/30/dont-become-victim-tax-relief-scam.html