Deductions are expenses that reduce the amount of income that is subject to taxation. The government has determined that certain expenditures should not be taxed, so it allows taxpayers to remove those expenses from their taxable income calculations.
For example, you can deduct the cost of a meal from their overall income calculation if that meal were purchased for business entertainment purposes. If the taxpayer purchased the same meal for himself and a friend, however, the meal would not be deductible. This is because the government has decided to encourage business expenditures, but not ordinary social encounters.
When a person begins doing their taxes, they first calculate their gross income. This is the total amount of income that the taxpayer received during the year, minus a few tax-exempt items. From there, the taxpayer can remove a few more expenses from their gross income figure to arrive at their adjusted gross income. You can then elect to claim either the standard deduction or list individual deductions. Most of the time, this decision rests on whether the standard deduction is larger than the individual deductions.
There are many, many things that taxpayers can include in the list of itemized deductions, including medical expenses, charitable contributions, business travel and entertainment expenses, and educational expenses. If a taxpayer’s adjusted gross income is above a certain amount, however, the total amount of deductions must be reduced.
It is important to note the difference between an itemized deduction and a tax credit. A deduction reduces the amount of income subject to tax – the taxpayer’s “taxable income.” A tax credit, on the other hand, reduces the amount of tax that the taxpayer owes – even after deductions have been factored in.
You may pay your tax liability in various ways. You may pay the IRS electronically or by sending a check or money order, made out to “United States Treasury”. You may pay the full amount of your outstanding balance or any other amount you are able to pay. Be sure to include your social security number on your payment.
Consider financing the full payment of your tax liability through loans, such as a home equity loan from a financial institute or credit card. This is because your unpaid balance is subject to interest that is compounded daily and a monthly late payment penalty, so it is in your best interest to pay your tax liability in full as soon as you can to minimize the amount of interest and penalty charged. The interest rate a bank charges is usually lower than the combination of interest and penalties imposed by the Internal Revenue Code. Full payment will stop any further collection notices or other collection actions.
If you cannot pay in full immediately, the IRS offers short-term extensions of time to pay in full from 10 to 120 days. If you cannot full pay your tax liability in a lump sum, the IRS offers a partial payment option. You may apply for an installment agreement. Installment agreements may be set up in various ways including the direct debit from your bank account; a payroll deduction from your employer; and an installment agreement.
If you enter into an installment agreement, your payment amount should be based on your ability to pay and should be an amount that can be maintained over the lifetime of the installment agreement. Direct debit or payroll deduction installment agreements provide you with the opportunity to make timely payments automatically, and therefore, these payment methods reduce the possibility of defaulting your agreement.
It is important not to ignore an IRS notice. If you do not make payments or other arrangements to pay the amount you owe in full, the IRS may file a Notice of Federal Tax Lien, and may take enforced collection action which could include serving a Notice of Levy or offset of a tax refund. If you are unable to make any payment at this time, call us to discuss your situation and we can help you create a plan. If the IRS determines that you cannot pay any of your tax debt, it may temporarily delay collection until your financial condition improves. Be prepared to provide pertinent financial information from documents you should have available to you during the call, such as current pay stubs, rental agreements, or mortgage statements, and car lease/loan statements.
Free Consultation with a Utah Tax Attorney
If you are here, you probably have a tax law issue you need help with, call Ascent Law for your free consultation (801) 676-5506. We want to help you.
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