Understanding Tax Liability

If you owe taxes, then you have what is called a “tax liability.” A lot of factors can affect your tax liability and, if you’re not careful and aware of what you owe and if you don’t pay it in a timely manner, the problem can just get larger, as interest and late fees get tacked on. Thus, it’s incredibly important to understand tax liability and if and how it affects you.  

Determining Your Tax Liability  

When you fill out your tax forms, you have an easy way to discover your tax liability for that particular tax year. Just look carefully at line 37 on the revised 2020 Form 1040 to determine how much you owe. Line 38 will also clue you in to any penalties you may owe.  

Adding those two lines together, if applicable, will tell you your tax liability, which you’ll need to pay by the tax deadline. If you can’t do that, then you may need to enter into an installment agreement or work out another arrangement with the IRS. Otherwise, you could face severe penalties, not to mention an ever-growing tax bill.  

Reducing Your Tax Liability  

So, what should you do if your tax liability is too high? While you could just accept it, pay it, or enter into a payment arrangement, the ideal solution is to, first, determine why it’s so high and then, if possible, to figure out what you can do about it.  

There are actually many ways to decrease tax liability, such as increasing withholdings during the tax year or taking advantage of deductions and credits. But, those things can be difficult to do without the help of a tax professional, which is why it’s always advisable to seek out expert tax help, especially if you always seem to owe more than you can afford.  

The Bottom Line  

Many people have tax liability. If you’re one of them, the key is to find a way to get your yearly liability to a manageable place or, when possible, to eliminate it entirely. Of course, if you have old debts, interest, and penalty fees weighing you down, this can be quite hard. Thus, if you ever find yourself in a situation where you owe more than you can manage or if you just want to avoid this type of issue entirely, be sure to entrust your taxes to experts. If you try and do it all on your own, unfortunately, there’s a good chance you’ll just keep digging yourself a bigger and bigger hole.

Can an Adult Be a Dependent for Tax Purposes?

Claiming a dependent can go a long way toward reducing your overall tax liability. In fact, the many benefits of doing so has plenty of people scrambling and hoping to classify others as their dependents. However, the tax laws are quite strict on who does and who does not qualify as a dependent. With that said, though, contrary to popular belief, not all dependents are minor children. In some cases, an adult can legally be classified as your dependent.     

The Importance of a Qualifying Relationship  

First things first, in order to claim another adult as your dependent, that person must have what the IRS considers a “qualifying relationship” with you. Normally, this would be someone who is a close relative, such as a sibling, half-sibling, step-sibling, or other close relation, whether they live with you or not. In the case of adult, non-related dependents, on the other hand, the person must live with you. Your relationship also cannot be illegal in your state.  

Income Matters 

Keep in mind, as well, that your adult dependent cannot earn too much money in order to be classed as such. They must have a taxable income that is below the personal exemption amount in a given tax year. 

Support is Considered  

Finally, understand that you must provide more than half of the financial support for your adult dependent in order to legally be able to claim them on your tax return.  

Still, Seek Advice  

Even if you feel fully confident that your adult dependent meets all of the qualifications described above, it’s still smart to seek professional financial advice before claiming the person. While adult dependents are not uncommon, they’re also not completely common, and you don’t want to do anything that could raise red flags with the IRS, at least not without the validation you need to back up your claims.  

For this reason, it’s smart to have a tax expert guiding you as you make your decisions about who and what to claim. In fact, this is good advice to follow for any uncommon or even slightly uncommon tax situation that you might find yourself in.

Understanding Installment Agreements with the IRS

When you owe a large debt or a tax liability to the IRS, it can feel very daunting, especially if you can’t pay what you owe all at once. Fortunately, the IRS deals with situations like this every day, and it has options in place to make it possible for taxpayers to more easily pay what they owe.  

Most often, the IRS will grant a monthly payment plan to make tax debts easier and more manageable to pay. These plans, also known as payment arrangements, are helpful to the tax payer. However, they do come with interest and penalties for late payments, so that’s something to be aware of.

If, regardless of the consequences, a payment plan is still your best option, you will simply need to fill out Form 9465 to request an installment agreement. If you’re unsure of whether you need an agreement or have questions about the form itself, you can contact the IRS or a tax professional for assistance.

Automatic Agreement

Often, taxpayers are very worried about whether or not their request for an installment agreement will be granted. However, that worry is often needless.

Generally, if you owe $10,000 or less, the IRS will perform a guaranteed acceptance of your installment plan. However, there are a few other criteria that you must meet. These include:

l  Not having filed your tax returns late in the last five years

l  Not having paid your taxes late in the last five years

l  Having filed all required tax returns

l  Agreeing to file all taxes on time in the coming years

l  Agreeing to pay all tax payments on time in the coming years

If you do not or cannot meet this criteria, don’t panic. Work with the IRS or your financial advisor to see what other options you have. Generally, the IRS does not want to make it hard for you to pay your debts and will work with you as long as you work with them!

Understanding Tax Liability

Tax liability is not something that most people truly understand. They may get that they want to avoid having “tax liability,” but the average person doesn’t really know why or how to do so.

In order to understand all of these things, you first have to understand what, exactly, tax liability is. Tax liability is simply a term for the money that you owe in taxes at the end of the tax year.

Some people, if their income and/or deductions are low enough won’t have any tax liability. If you don’t fall into that category, however, bear in mind that there are still many things you can do to reduce your tax liability.   

Simple but Effective Tips for Reducing Tax Liability

To start off with, one very easy way to reduce tax liability is to take advantage of as many deductions as possible. There are all kinds of deductions available, such as home office deductions or business expense deductions, that can save you money. However, if you’re not aware of these deductions, you can’t benefit from them. That’s why it’s important to have a qualified tax adviser who can find deductions for which you’re eligible and then ensure that you use them to your maximum benefit.

Another method you can try to reduce tax liability is to give to a legitimate charitable organization. Your donation or donations will be tax-deductible, which means your taxable income is reduced. That, in turn, can reduce your tax liability. So, in this way, the more you give, the more you can reduce your tax liability.

Believe it or not, something as smart as saving for retirement can also benefit you when it comes to reducing tax liability. When you put money in a 401(k), for example, you can reduce your taxable income and, thus, your tax liability. Not all methods of saving for retirement will help with reducing tax liability, but many will, so just follow the advice of a financial professional if reducing tax liability is your main goal.

As you can see, you have a great many options for reducing tax liability. These are just a few of many. To discover all of your options and to take advantage of them to the fullest, be sure to work closely with a tax professional.

Do You have a Tax Liability?

Many Americans live in fear of having “tax liability,” but the funny thing about that is that most Americans don’t truly know what that term means. They know, from their accountants and general talk, that it is a bad thing, but most of them cannot accurately define it.

In short, “tax liability” means owing money to the Internal Revenue Service (IRS) at the end of the tax year, and, while that’s certainly not a good thing, it’s not nearly as scary or, to put it bluntly,

nearly as big of a deal as most people make it out to be. In fact, a great many people and businesses regularly have tax liability at the end of the tax year.

The good news is that it is possible to reduce the likelihood of tax liability with the help of a knowledgeable financial adviser through finding and taking good advantage of available deductions, signing up for credits, and more. Plus, if you do have tax liability, there are ways to get around it, or, at the very least, to pay it off with ease. The key is to, first of all, not panic when you hear the term “tax liability,” and to, secondly, understand the ins and outs of tax liability and what you can do about it if it occurs and to prevent it from happening in the first place.

Claim Deductions Like Crazy

As mentioned, one of the best ways to deal with tax liability is to keep it from happening in the first place, and, also as mentioned, one of the easiest ways to do that is by claiming any and all available deductions for which you are eligible.

Even when you think you have filed for all possible deductions, if you are still coming up with liabilities, it is time to contact a professional accountant and/or tax adviser. These professionals know the ins and outs of every single tax law and deduction there is, and, those they don’t know, they can easily look up.

They know how to pull totally legally “tricks and tips” to help you obtain more deductions than you ever thought possible, so if, on your own, your deductions are coming up short, these are the people to turn to.

Give From the Heart (And Benefit the Pocket)

Another easy way to reduce your tax liability is to be a giving person; in other words, by making tax deductible donations to legitimate charities, you can reduce your tax liability. This is great because, not only can you help others, but you can help yourself as well.

Again, though, professional help is smart since you need to know how to donate, what to donate, and in what amounts in order to reduce your liability legally without raising suspicion and making yourself more likely to be audited.

As you can see, there are things you can do to reduce tax liability and to prevent it as well, but none of this is easy to do without professional help, so, if you don’t already have a trustworthy tax adviser, there is no better time than the present to find one.

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