The strained economy and lasting effects of the pandemic have made it hard for many Americans to pay their bills. Their taxes are no exception. Thousands of Americans found themselves owing more than they could afford. Tax debt can be quite stressful, carrying the threat of levies and wage garnishment.
The good news is that there are several avenues for tax relief. The IRS is willing to negotiate with struggling taxpayers. In light of the pandemic, they have even rolled out new options.
If you’re struggling to pay your tax bill, here’s how to apply for relief. We’ll also look at some helpful ways to reduce your tax liability, no matter your financial situation.
What types of tax debt relief are available?
Depending on your financial situation, you could get more time to pay or even a reduction in your bill. Under the Fresh Start Program, the IRS offers several tax relief options, including:
Extensions: After you file your tax returns, you can usually get up to 120 days to pay the amount you owe. The IRS’s pandemic relief program currently extends this to 180 days. You generally don’t need to meet any special requirements to get an extension.
Tax Lien Withdrawal: In lieu of tax levies, the IRS may place a lien on your home or other property, meaning they have the right to claim and liquidate it if you default. This can affect your credit. To avoid this, you may be able not set up a payment arrangement with the lien. As long as you keep paying, the lien won’t be reported to the credit bureaus.
Offers in Compromise: You settle your debt for less than you owe. To qualify, the debt usually must be at least 3 years old, you’ve filed all your returns, and you’d experience major hardship if you were to pay the bill. You will also typically need to sacrifice some of your assets that the IRS can liquidate to resolve your debt. Only pursue this route with the help of a qualified tax professional
Installment Plans: You will agree to pay a set monthly amount for up to 6 years until the debt is resolved. There is a setup fee, although this can be reduced if you agree to automatic withdrawals from your checking account. This plan is for taxpayers who owe $50,000 or less.
Notably, if you don’t keep up your end of these agreements, you could face penalties, steep interest, and possible tax levies.
What tax relief options does the IRS offer to help during the pandemic?
In 2020, the IRS launched the Taxpayer Relief Initiative to help taxpayers affected by the pandemic. Here are the new tax relief options in this program:
- Short-term extensions now last up to 180 days after filing your tax returns
- Flexibility in renegotiating payment plans if you default on your agreement
- Those who owe less than $250,000 may request installment agreements without providing financial substantiation
- The collection holds / deferred taxes may be granted due to financial hardship
- Waiver of penalties for first-time offenders and for those with good cause
What are the options for property tax relief?
As property taxes are based on properties’ assessed value, they can rise unexpectedly. This can make it challenging for property owners to pay their taxes. Unpaid property taxes may trigger foreclosure. If the property is a rental, the landlord may be forced to raise rent and potentially lose their tenants.
Different states have different methods and qualifications for property tax relief. Common property tax exemptions include:
- Homestead exemptions for those who permanently reside in their homes, deployed military, disabled veterans, and those who live with elderly family members
- Senior property tax deductions based on the property owner’s age and/or disability status
- Option to appeal the assessed value of your home
How can I reduce my self-employment tax?
Self-employed taxpayers and small business owners often face steep taxes. Setting up a pass-through entity such as an LLC can help. However, if you still need tax relief for self-employment, consider these strategies:
- Home office deduction: Claim the office space in your home, along with the expenses needed to operate it. These may include any rent, mortgage payments and interest, insurance, and repairs. You can also include the equipment and utilities, e.g., your phone and internet expenses.
- Health insurance premium deduction: You may claim the full amount of all medical, dental, and long-term care premiums for yourself, your spouse, and any children under the age of 27.
See also “Retirement contributions” in the next section.
What are the five general tax reduction strategies?
The best form of tax relief is to reduce what you owe to begin with. The smaller your tax bill, the less likely you are to struggle with payment. Here are five options for lowering your tax liability.
Tax withholding optimization
Your tax withholding determines how much of your income was reduced to cover potential taxes owed. If this isn’t calculated correctly, you could end up underpaying on taxes — and potentially incurring a penalty. Underpayment can also happen if you are self-employed, earned high commissions or bonuses, or sold a business. Check with your CPA to make sure your withholding is in proportion to your expected tax liability.
Retirement contributions
You can reduce your tax liability by maxing out your contributions to your IRA, 401(k), 401(b), or 457 plan. The maximum contribution may change by the year, so check with your CPA. The IRS will deduct your contributions, effectively lowering your taxable income. This includes all pre-tax elections to employer-sponsored plans, as well as post-tax contributions to a retirement account.
Tax credits
If you meet certain financial conditions or make certain investments, you may qualify for tax credits. These are pre-determined amounts that offset your liability. Common tax credits include:
- the Saver’s credit for retirement (see above)
- The American Opportunity Tax Credit for higher education ($2500 per year)
- the Lifetime Learning Credit (20% of up to $10,000 in continuing education)
- The Child and Dependent Care Credit (under the American rescue plan, the child tax credit goes up to $3,000 per dependent for children aged 17 or younger)
- The Earned income tax credit (varies by year, provides tax liability deductions to low- to moderate-income taxpayers)
Donating to charity
You may qualify for tax liability deductions if you donate money or property to a qualified 501(c)(3) charity. Itemized deductions can be claimed up to 60% of your adjusted gross income. Under the CARES Act, cash donations can be deducted at 100% of their value. There is also a standard deduction for non-itemized donations of cash, amounting to $300 per filer.
If you have long-term assets (e.g., stocks, bonds, mutual funds) in a taxable account, you can donate those to a certified nonprofit. Talk to your CPA to set up a donor-advised fund. Your tax liability will be reduced by the fair market value of the donated assets.
Tax-loss harvesting
If you’re facing high taxes on your capital gains from stock options, you may consider selling an asset to claim the loss. This could be a good strategy if you’re already rebalancing or diversifying your portfolio and/or you’re trying to minimize the higher taxes on short-term gains (assets held less than a year). Work with your CPA to see if this could a viable strategy to reduce your tax liability.
Conclusion: Tax relief is Possible!
With a bit of research and some careful strategies, you can reduce your tax liability and get help paying your tax bill. To navigate these situations, consult with your CPA or tax advisor. Be sure to check out the IRS Tax relief Network for more guidance and resources!
