Financial pressure quickly mounts for individuals who owe substantial amounts of taxes and back taxes. People often ask, does filing bankruptcy for tax debt provide you with real relief? Does bankruptcy discharge back taxes? Is filing chapter 7 or chapter 13 bankruptcy the better approach? In this guide, these important questions will be addressed to help provide you with a clearer understanding of all matters related to tax debt and bankruptcy.
One major misconception is that filing bankruptcy on taxes does not work, and that taxes are never discharged. That’s actually not the case. When a specific set of criteria are met, then filing bankruptcy on tax debt actually does work, meaning that you’re able to successfully discharge those taxes.
However, in most cases, only income tax can be discharged, not other IRS tax debts such as payroll taxes, or penalties. Of course, there are always specific conditions, circumstances and so forth which must be met, and in many cases, there are exceptions to the rules.
Conditions that must be met include a range of issues, but importantly that there was no fraud or tax evasion involved, and that a tax return was filed. The back taxes owed must also be at least three years old. This makes the timing of filing bankruptcy on taxes tricky for individuals, and is one of the major reasons why discharging tax debt does not work for many people.
When the appropriate conditions are met, taxes can be discharged. Even they cannot be discharged based on the circumstances, filing bankruptcy may still provide substantial relief The good news is that, yes, bankruptcy still may help provide you with serious financial relief depending on your circumstances.
For instance, if you file chapter 13 bankruptcy, taxes that are not eligible for discharge may be repaid interest and penalty fee over as long as 60 months. In Chapter 13, a single monthly repayment plan is created, giving you something more manageable, and allowing you time with a realistic approach to pay off debts and get back on track. Otherwise, by filing chapter 7 bankruptcy, you may at least be able to achieve freedom from other debts you may have, allowing you to more easily pay back your taxes.
Of course, it’s always important to consult with an experienced bankruptcy attorney before deciding to file, or to seek out other potential alternatives and viable solutions. As mentioned, there are many different conditions and circumstances which may apply, and you’ll want to carefully analyze your entire financial picture before moving ahead with tax debt and filing bankruptcy.
Although various localities have specific mechanisms, nearly every one has a process to appeal or grieve one’s real estate taxes. In most cases, this can either be done by oneself, or you can hire someone else (or some company) to do so, for you. Why would someone grieve his real estate taxes? One reason might be because most of your neighbors do so, and you will suffer financially, by not doing so. Another is, if you believe your house is being appraised for more than it should be, and thus, you will being paying more taxes than you need to, or should. Regardless of your reasons for doing so, every homeowner should realize he has certain options and rights, and this article will attempt to touch upon 3 of the basic steps in appealing and correcting something which might adversely impact you.
1. Comparative Market Analysis (CMA): Before you can claim you are being charged too much, you must create and present a basis for your belief. In nearly every locality, one must accumulate realistic, relevant, comparable homes, and compare what they are being charged in taxes, to what you are. For example, if you can locate 5 or 6 homes, which are similar in size, location, property, condition, etc, and their assessed values vary significantly with your home’s, you have created the best initial basis, for appeal. If you are capable of doing so, yourself, you will gain the greatest benefit, but if you cannot, or don’t have the time or inclination, contact a reputable company, to handle this for you. In many cases, these companies will charge you up to 50% of your savings, but remember, that’s still far better than what you would otherwise be paying, etc. In addition, you’ll only be charged the fee, if you receive a reduced assessment, and savings!
2. Show what others pay in taxes (or are assessed): Once you’ve identified the relevant other properties, show how much less they may be paying than you are. This is what you submit as your grievance, etc.
3. Fill out the necessary forms/ paperwork: Depending on your location, this process might either be rather simple, or more complex/ complicated! In either case, you must obtain, and properly fill out completely, all the necessary forms and paperwork. This is another reason many people opt to use one of the companies that provides this service.
While it is your responsibility to pay your real estate taxes, it is not, to pay more than you should fairly do so! If you believe you are being unfairly taxed, relative to your neighbors, follow the grievance or appeals process.
Now that tax season is over, did you have to pay taxes instead of getting a refund? You’re definitely not alone, and there will probably be a repeat performance next year.
There are several things you can do to increase your chance for a refund and you don’t have to be a tax accountant to take advantage of these deductions. The key is to start planning now, and not wait until the end of the year. Below is a list of what you should do.
Contribute to a 401K or IRA
Most people think the only reason to contribute to a retirement fund is to ensure financial independence as you age, but it can also have short-term tax benefits. Most of the time the money you put towards your 401K and IRA are tax-deductible and are not included in your taxable income.
Donate to a Charity
Charitable donations or expenses tied to volunteering can all be itemized and deducted from your income at tax time. Just remember to save all receipts and keep track of all the miles you travel on behalf of a charity or the organization you are volunteering for. These miles will be deductible at 14 cents per mile for 2018.
Buy a Primary Residence
There’s a clear tax benefit to owning a home. The interest you pay on your mortgage is all tax deductible. For the first several years, mortgage payments go towards interest, which will radically decrease your adjusted gross income at tax time. Think about paying January 2019’s mortgage payment in December to get the maximum tax benefit in April.
Invest in Solar Energy
If you’re making a list of home improvements, consider adding solar panels to that list. Solar will earn homeowners up to 30% of their installation costs in tax credits. I would hurry because those credits will decrease after 2019.
Claim Education Credits
Student loan interest and/or tuition can be used as a tax deduction. Current students can also access the American Opportunity Credit, which covers up to $2,500 annually for four years, and the Lifetime Learning Credit, which can cover up to $2,000 per tax return.
Start A Home Business
Starting and maintaining a business in your home will give you a new source of income, but more importantly, allow you to take deductions on all income that is generated from the business. These specific deductions may include business expenses, portions of your mortgage, utilities, repairs, and even the startup costs for the business.
Medical or Dental Expenses
Many of your medical and dental expenses are tax-deductible as is the transportation and parking costs.
Open a Flexible Spending Plan
Many employers offer flexible spending plans that will let their employees contribute towards their annual medical expenses. These medical contributions generally do not count towards taxable income.
If you find yourself in the hunt for a new job this coming year, remember you can write off some of the expenses associated with finding new employment. These write-offs include clothing, travel, food, etc. And, these expenses are deductible even if employment is not found within the tax year.
Make Estimated Payments
As is often said, the best defense is a good offense. If you’re concerned that your deductions will not cover you appropriately for the tax year, it will be advantageous to make quarterly payments that you and your tax accountant think will cover your income that is not subject to withholding tax.
Start a Family
Child tax credits are still included in the new tax reform bill. In fact, they have been increased from $1,000 per child to $2,000.
Find Every Available Tax Credit
We’ve named many tax credits in this article, but there are many more that can be utilized. Some of these include childcare costs for low-income households and adoption. Keep in mind that tax credits are more valued than simple deductions because they can reduce your taxable income on a dollar-for-dollar basis.
The tax Cuts and Jobs Act of 2017 that was signed into law in December provided a major overhaul to the previous tax law. This law will affect your tax planning for 2018 so it will be important to have a pro do your taxes. No matter how much you think you know or how much research you do, a professional will be able to identify those tax deductions and tax credits that will be beneficial to you. A professional will also help you stay organized and minimize your tax obligation.
Remember, be a wise taxpayer and learn how to make money out of your tax return.
The Tax Laws have quite a few recent changes, here are 20 thing you should know.
1. 2017 Taxes: The new laws will be applied to 2018 taxes.
2. Property taxes: The max total that can be written off is $10,000 for the combination of property taxes + income & sales tax
3. Mortgage Interest Write-Off: The deduction has been lowered, now you can only deduct the first $750,000 of your mortgage interest.
Home Equity Line mortgage interest will no longer be tax deductible on a primary residence unless the funds are used for renovations.
4. Capital Gains: This exclusion will remain the same at $250,000 for single & $500,000 for married couples. You have to live in the property for two of the last five years as your primary residence
5. Standard Deduction: this deduction has nearly doubled.
• Single Filers: the new standard deduction has risen to $12,000.
• Married Joint Filers: the new standard deduction has risen to $24,000.
6. Investor Business Assets: Business assets purchased new or used after September 9th 2017 such as equipment, furniture, fixtures, appliances, computer and so on for real estate activities have a 100% bonus depreciation deduction as an immediate write-off of the expense rather then having to depreciate it over time.
7. Business entertainment: These expenses are no longer tax deductible.
8. Estate Tax: The Estate Tax is applied to the transfer of property after someone dies. The amount exempt from the tax has been doubled from the $5.49M for individuals & $10.98M for married couples
9. Health Insurance: The penalization for not having health insurance has been eliminated. The Congressional Budget Office has predicted that as a result, 13 million fewer people will have insurance coverage by 2027, and premiums will go up by about 10% most years.
10. Personal Exemption: This deduction is now gone. Previously you could claim a personal exemption of $4,050 for: yourself; your spouse and each of your dependents which would lower your taxable income.
11. The Child Tax Credit: This credit has been increased to $2,000 for children under 17. The entire credit can now be claimed by a single parent who makes up to $200,000 & married couples who make up to $400,000.
12. Non-Child Dependents: This can apply to a number of people adults support, such as children over age 17, elderly parents or adult children with a disability for a $500 temporary credit.
13. Medical Expenses: You can deduct medical expenses that add up to more than 7.5% of your adjusted gross income.
14. Alimony Payments: The person that writes the checks cannot deduct their alimony payments if the Divorce or Separation paperwork is dated after 12/31/2018
15. Student loan interest:
The $2,500 annual deduction for student loan interest will remain.
16. 529 Savings Accounts: These qualified tuition plans aren’t taxed but could previously only be used towards college expenses. Now annually $10,000 can be distributed to cover the cost of sending a child to a Public, Private or Religious elementary or secondary school.
17. Deficit: The net number crunched by the nonpartisan Joint Committee on Taxation estimate that the Tax Reform will likely increase deficits by $1.46 trillion over the next decade.
18. Corporate Tax: Their rate is coming down to 21% from the previous 35%. The alternative minimum tax for corporations has been thrown out as well.
19. Tax Preparation Deduction: The deduction for having your taxes prepared by a professional or for accounting software has been eliminated.
20. Fewer Local Accountants: The increase of Standard Deductions will likely result in more people preparing their own personal tax returns.
On the campaign trail Trump has said “I want to put H&R Block out of business”. Over time there will likely be less local professional accountants along with their advice, the community will likely suffer from this loss.