Facts About Tax Relief
Tax relief is a term that refers to a broad range of measures that governments take to provide tax assistance to businesses and individuals who are facing financial difficulties. The primary purpose of tax relief is to stimulate economic growth and reduce the burden on those who are struggling to make ends meet. Tax relief can take various forms, including tax credits, tax deductions, and tax exemptions. This article will dive into the world of tax relief in detail, highlighting the benefits and drawbacks of these measures, and how they can help taxpayers save money.
Tax credits are a type of tax relief that reduces the amount of taxes owed by the taxpayers. It is a dollar-for-dollar reduction of the taxes due. Tax credits come in two main types: refundable and non-refundable.
Non-Refundable Tax Credits
Non-refundable tax credits can only be used to offset the tax liability of a taxpayer. For instance, if a taxpayer has a tax liability of $5,000 and has a non-refundable tax credit of $1,000, the tax liability will reduce to $4,000. The remaining $1,000 non-refundable tax credit cannot be refunded as cash.
Common examples of non-refundable tax credits include the Earned Income Tax Credit (EITC), Child Tax Credit, and Retirement Savings Contribution Credit. The EITC is a tax credit designed to help low and moderate-income workers reduce their tax liability.
Refundable Tax Credits
Refundable tax credits, on the other hand, not only reduce the tax liability of the taxpayer, but any excess credit beyond taxes owed can be refunded as cash. For example, if a taxpayer has a tax liability of $100 and has a refundable tax credit of $500, the taxpayer will owe no taxes, and the government will refund the difference to them.
Common examples of refundable tax credits include the American Opportunity Credit, Additional Child Tax Credit, and Earned Income Tax Credit.
A tax deduction is another type of tax relief that reduces the amount of income subject to tax. A deduction lowers an individual’s taxable income. Tax deductions are subtracted from the income before the tax liability is calculated.
There are two types of tax deductions, standard deductions, and itemized deductions.
Standard deductions are a fixed deduction amount that reduces the adjusted gross income (AGI) of the taxpayer. The amount of the standard deduction varies depending on the taxpayer’s filing status. For 2021, the standard deductions for the various filing statuses are:
– Single or married filing separately: $12,550
– Married filing jointly or qualifying widow(er): $25,100
– Head of household: $18,800
It can be difficult to decide between the standard deduction and itemized deduction. The U.S. Internal Revenue Service (IRS) provides taxpayers with the option to itemize their deductions instead of taking the standard deduction. The taxpayer can choose to take the standard deduction or preference for itemized deductions, whichever is higher.
Itemized deductions are expenses that the taxpayer incurred during the tax year. They include medical expenses, state and local taxes paid, mortgage interest, charitable contributions, and casualty losses. Itemized deductions can only be claimed if they exceed the standard deduction. For instance, if a taxpayer’s itemized deductions add up to $10,000, their standard deduction will default as an option not worth exploring, given that the standard deduction is $12,550.
Capital Gains Tax Relief
Capital gains tax relief seeks to reduce the tax burden on taxpayers who have realized gains from the sale of investments and property. Depending on the holding period, capital gains are classified as either short-term or long-term. Short-term gains are gains realized on the sale of investments that were held for less than a year. Long-term gains are gains realized on the sale of investments held for over a year.
Short-term gains are generally taxed at the same rate as ordinary income, which is usually higher than long-term gains. Long-term capital gains are taxed at a lower rate than short-term gains. The current long-term capital gains tax rates for 2021 are:
– 0% for taxable incomes below $80,800 for married filing jointly and qualifying widow(er), $54,100 for heads of household, $40,400 for single filers and married filing separately.
– 15% for taxable incomes between $80,800 and $501,600 for married filing jointly and qualifying widow(er), $54,100 and $473,750 for heads of household, $40,400 and $445,850 for single filers, and $40,400 and $250,800 for married filing separately.
– 20% for taxable incomes over $501,600 for married filing jointly and qualifying widow(er), $473,750 for heads of household, $445,850 for single filers and $250,800 for married filing separately.
Tax exemptions are a type of tax relief that allows taxpayers to reduce their taxable income by excluding particular kinds of income. Examples of tax exemptions include exemptions for dependents, personal exemptions, and exemptions for specific types of income.
The dependent exemption is offered to qualifying taxpayers who have dependents, which could include children, parents, or other relatives. The exemption helps to reduce the taxpayer’s taxable income by a fixed amount for each dependent.
In 2017, the Tax Cuts and Jobs Act suspended the dependent exemption until 2025. Taxpayers can still claim child tax credits and dependent care credits during this period.
Personal exemptions allow taxpayers to reduce their taxable income by a fixed amount. In 2017, the Tax Cuts and Jobs Act suspended personal exemptions until 2025.
Exemptions for Specific Types of Income
Certain types of income, such as social security benefits, railroad retirement benefits, and veteran’s benefits, are exempt from taxes. These income sources are not subject to federal taxation.
The Bottom Line
Tax relief is essential as it provides a financial cushion for struggling individuals and businesses. It reduces the tax burden on the taxpayer and promotes economic growth. Tax relief comes in various forms, including tax credits, tax deductions, and tax exemptions. These measures help taxpayers save money in different ways, whether by reducing their tax liability or their taxable income. It’s always a good idea to consult with a qualified tax professional to understand which tax relief measures can benefit you most.
Taxes are imposed by all forms of government to raise money for current expenditures and public services. Without the levy, a government would crumble and fail to provide the citizens of the particular jurisdiction with necessary goods and services. That being said, taxes are obviously a tedious and unenvious process that is a part of every citizen’s life. The United States tax system, to mitigate the drudgery involved in the collection process offers tax relief to qualifying individuals or businesses.
Tax relief is typically offered to an individual or business who owes back taxes. As a result of the complexities and time restraints found in the levying process, many businesses and individuals fail to properly file their tax returns. As a result of this, the federal government attaches late fees or interest payments to the unfulfilled taxes. Those who experience such unfortunate circumstances should seek the aid of a tax relief attorney to organize and solve the predicament associated with the tax return.
The majority of corporations and individuals seeking tax relief are unaware of the various rules and regulations associated with the levy. Tax debt issues, therefore remain a conundrum for the vast majority of individuals placed under them. The inclusion of a tax relief attorney is needed in these situations because such professionals are well-versed in the situations that would call for tax relief assistance.
A tax relief attorney will seek the aid of numerous tax relief programs which will itemize the debt and allow the individual to participate in a tax relief payment system. In addition, a tax relief attorney can also reduce the amount owed, or clear a significant portion through restructuring or organizing the entity’s tax return.