Personal Tax Credits

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 What Is Income Tax Law?

Income tax is a percentage of a person’s earnings, due to both the state and federal governments each year on April 15. The amount of tax that a person owes is calculated by subtracting any permitted deductions from their income. The Internal Revenue Service (“IRS”) is the entity that collects taxes.

Federal tax laws are based on the Internal Revenue Code (“IRC”), which includes the rules and regulations regarding federal income tax. Nearly all people or businesses that have earned an income are subject to these taxes. This includes those who are not United States citizens, so long as they earned income from a source in the U.S. Income taxes are intended to increase the revenue necessary to operate the government.

Most people pay their income tax by having them withdrawn from their paychecks. Employers withhold a portion of their employee’s wages and send the amount to the IRS. In some cases, this amount is insufficient to cover the person’s federal income tax liability, in which case the taxpayer must send a payment to the IRS by April 15. If they cannot pay the entire amount at once, the IRS may work with them to create a repayment plan.

The 16th Amendment to the U.S. Constitution gives Congress the power to create and collect income tax and resulted in the passing of the Internal Revenue Code. The IRS enforces the IRC.

The IRC sets the standards for all tax laws, including:

  • Federal;
  • State; and
  • Local tax regulations.

According to the IRC, income tax is a specific type of tax that the government imposes on personal income. If your employer deducts income taxes from your paycheck, this will be reflected when you file your state and federal taxes for the year. This is why you will sometimes receive a tax refund or excess payment after you file your taxes because you paid more income tax than was necessary for the year.

However, not everyone is subject to income tax laws. An example of this would be how the federal government does not collect income tax from the unemployed. Additionally, some states may not subject their residents to state income taxes.

What Are Personal Tax Credits?

Personal tax credits are reductions in federal and state taxes made available to those who qualify for them.

The following are some of the most common personal tax credits available:

  • Child Tax Credit: You can claim a $1,000 child tax credit for every qualifying child under the age of 17. This credit is eliminated if your adjusted gross income is above $110,000; if you are married and filing jointly; or $75,000 if you are filing as single;
  • Child Care Credit: A credit intended to reimburse you for hiring someone to care for your child or dependent. In order to qualify, you must incur the care expenses while earning an income; you must pay for at least 50% of the costs of the dependent; you must file jointly if you are married; you must hire someone other than another one of your children who is older than 19; and, you must report the identifying information of your caretaker. The credit largely depends on your income and only applies to the first $3,000 spent for one child or $6,000 for two or more children;
  • Earned Income Credit: A credit that can be claimed by workers with qualifying children who meet specific income requirements. The EIC can be up to $2,574 for one child and $4,205 if you have more than one child. To qualify, you must have an adjusted gross income of under $29,666, or $30,666 if married and filing jointly, and you have one qualifying child; or $33,692, or $34,693 if married and filing jointly, and if you have more than one child. The child must have lived with you more than six months during the year; additionally, you must file a joint return if you are married to qualify, and you yourself are not a qualifying child of another person;
  • Adoption Credit: An adoption credit of up to $10,160 may be available for the costs of adopting a child under 18, or a mentally or physically disabled person. To claim the credit, you must fill out Form 8839. Additionally, the adoption must have been finalized by the end of the year. Fees that can be deducted include adoption fees, court costs, attorney fees, and travel expenses;
  • Health Coverage Tax Credit: The Health Coverage Tax Credit (“HCTC”) is a program that can help pay for nearly two-thirds of eligible individuals’ health plan premiums. Taxpayers must be enrolled in a qualified health plan to be eligible. This includes COBRA, state-qualified health plans, or if the taxpayer is enrolled under their spouse’s work plan and pays more than 50% of the total health care costs; and
  • Welfare To Work Tax Credit: A federal income tax credit that encourages employers to hire long-term family assistance recipients, who begin to work any time after December 31, 1997, and before January 2004. This tax credit can reduce an employer’s federal tax liability by up to $8,500 per new hire.

What Happens If I Do Not Pay My Taxes?

A taxpayer who does not pay all of their taxes may be subject to various fines. If there is a legitimate reason why a taxpayer did not pay their taxes, they may be able to negotiate for an extension or set up a payment plan to pay taxes still owed in monthly installments.

If taxpayers do not have a valid reason why they did not pay all of their taxes or deliberately avoided paying off their taxes, they could be charged with a felony. This is because it is illegal to refuse to pay taxes; a person who engages in an intentional scheme to avoid paying taxes to the IRS is committing tax evasion. Tax evasion is a felony offense that can result in a prison sentence of up to five years.

Additionally, a taxpayer who only pays a portion of the taxes they owe may be subject to an audit by the IRS. An audit reviews a person’s financial information and various monetary accounts. Audits confirm that taxpayers accurately report their taxes and comply with federal tax laws, which could result in criminal consequences, amended tax returns, or no changes at all.

Do I Need A Tax Lawyer?

Federal and state tax laws are notoriously difficult to understand; additionally, the IRC is amended every year, so all federal, state, and local tax laws are subject to change. You should consult a local tax law attorney if you are experiencing issues paying your income taxes.

An experienced tax lawyer can communicate with the IRS on your behalf and negotiate an offer to compromise. They can ask the IRS if it would be willing to extend your payment deadline, or alternatively, if it would sign an installment plan agreement. Additionally, your tax attorney could petition the U.S. Tax Court if there is an error with your tax return, and can provide representation in court.

If you are being audited by the IRS, your tax law attorney can ensure that the audit is properly conducted, and that your rights as a taxpayer are rigorously protected.

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