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How to Avoid and Combat Tax Debt

Man upset because of tax debt
Nobody wants to face tax debt during the holiday season

When the new year comes around, some people start thinking about enjoying the holidays or setting resolutions for the year. For others, the dawn of a new tax year is a stark reminder of their accruing debts. If you’re in this position, you need to learn how to avoid and combat tax debt.

It’s tempting to put your head under the sand and hope everything magically turns out okay. But this is a recipe for disaster. Instead, educate yourself on how taxes work and consult a professional to help you. 

We’ll cover tax deductions, tax refunds, the Tax and Job Reduction Act, income tax withholding, tax guidelines for employers, and improving your credit score.

Maintaining a good credit score and avoiding debt

Nobody wants to have the IRS right on their back for noncompliance — it’s a nightmare. To avoid complications, pay your debts on time and maintain a good credit score.

Failing to do so could result in a tax lien.

Tax liens

If you fail to make tax payments on time, the IRS won’t disclose your tax information to credit bureaus. However, non-compliance can result in a tax lien — this has serious implications that can indirectly damage your credit score.

If you owe more than $10,000 and don’t pay within 30 days, the IRS will automatically file a tax lien. This gives them the right to legally claim your assets and property. Your credit score will drop and the IRS will deduct monthly payments from your bank account until you pay off the debt.

If you receive a tax lien, it’s essential to comply until you pay off the debt. Eventually, it will be removed from your credit history. You can also enroll in a payment plan if the payments are too high, or request the lien’s withdrawal in exceptional circumstances. This won’t be reported to credit bureaus or affect your credit score.

Infographic about tax liens
Avoid tax liens at all cost

Maintaining a good credit score 

To maintain a great credit score, make sure you pay your taxes on time each year and correspond with the dates for any special agreements or payments in installments. 

If you have a year-end tax bill for income taxes, it’s best to make that payment by the April, 15 deadline. There are also ways to make an alternative agreement with the IRS to avoid a tax lien and protect your credit score.

For property taxes, many taxpayers use escrow accounts. These accounts mediate between the two parties in a transaction and take the stress out of making the payments.

Another problem you could face from failure to pay is late payment fines. These fees will charge you not only the amount owed but also additional charges.

If you pay your taxes by credit card or personal loan and owe money, this could negatively impact your credit score. Before making tax payments, check your credit score and decide on your best payment options.

Of course, it’s not just tax liens that can hurt your credit score. Another way to damage your reputation with credit bureaus is through non-compliance with other financial institutions, like credit card companies.

A seesaw representing tax debt
Staying on top of debts is a balancing act

Tax deductions and other perks

Most taxpayers have until December 31 to submit their tax declaration. Plan in advance to ensure you get the most out of your deductions, which is a great way to reduce your bill and tackle any debt.

Deductions and charitable contributions are popular ways to offset your tax bill. You must make them in the same year you pay the taxes, so if you use a credit card or check to donate before December 31, you can only deduct from the same tax year. It doesn’t matter if you pay in 2021.

Then there are standard and itemized deductions to consider. Thanks to the Tax Cuts and Jobs Act of 2017, fewer people claimed itemized deductions in 20117, including medical expenses, state or local taxes, charitable donations, and mortgage interest amortizations. Instead, they’re making more use of standard deductions.

42.2 million taxpayers filed for itemized deductions in 2017, that figure decreased to 14.6 million taxpayers after the Tax and Employment Reduction Act. Now, it’s less likely that itemized deductions are worth it.

Charitable donations decreased to $292 billion in 2018, a drop of 1.1% compared to 2017. Part of this decrease may be due to the decline in people making itemized deductions. “Bunching” is a way to maximize this strategy by combining charitable gifts from several years into one tax year, helping taxpayers reduce their tax burden.

The most significant change regarding itemized deductions is the new $10,000 cap on total (SALT) deductions. These apply to state and local real estate, personal property, and income and sales tax deductions. For example, in New York, taxpayers who itemized in 2017 could claim SALT deductions up to $23,804, according to figures from the Fiscal Policy Center.

Pensions

People over the age of 70 and six months usually take their pension out of an individual retirement account or workplace retirement plan at the end of the year. Those who turn 70 years and six months that year must wait until April 1 the next year to take the money out. You must contribute to your workplace pension before the end of the year, but you can add to your IRA until April 15.


Some taxpayers may be eligible for Savers Credit, a tax credit for contributions to an IRA or workplace pension account. For this, the income limit is $64,000 for married couples filing joint returns, $48,000 for heads of household, and $32,000 for individuals.

American flag and tax return
Be smart about your tax returns

Tax refunds

The IRS has recently made some changes that have resulted in lower tax refunds. Some taxpayers expected to receive higher refunds after new Tax Cuts and Jobs Law, but instead, they paid less tax during the fiscal year. This implies lower tax refunds.

In 2018, the IRS made more than 111 million refunds to tax returns made, worth around $2,860 per taxpayer. In 2017, the IRS granted around 12 million refunds, and the average refund value was $2,899.

Earlier last year, the IRS and the treasury department released their new withholding tables for tax review. Use these tables with a Form W-4 to determine how much income tax the IRS will withhold from your paycheck. This depends on your income, the income of a working spouse, and the dependents in your home.

It’s crucial to fill out your Form W-4 correctly. If you don’t, you could owe the IRS because it didn’t withhold enough tax or receive a refund for paying too much tax. Whichever happens, it can be a stressful experience.

Many Americans have found the changes confusing. If you made deductions from previous years or exemptions for your dependents, this might be why you’re paying less tax between 2018 and April 2020.

Some affected states have litigated against the federal government because the inability to deduct high income and property taxes affects how attractive one state is to people from another state.

Tax is no longer something to worry about getting ready by April 15 each year. Instead, plan for the whole year. Your account should draw up a projection of your finances and prepare a more cost-effective way to donate to charity or consider moving to a state free from income taxes.

Infographic about W-4 forms
Make sure you understand the new system

Ensure there are no problems with your tax return

Many issues can come in the way of your refund. The IRS usually issues refunds within 21 days. However, it could take longer. Also, certain statements require further review and can cause delays, like errors, an incomplete form, or suspected fraud or identity theft. However, the IRS will let you know if there’s a problem.

To get your refund as quickly as possible and keep the process running as smoothly as possible, here are some precautions you can take.

Many taxpayers get their refunds faster through electronic filing and direct deposit. It’s a straightforward system to use, and even better, it’s safe. The same electronic transfer system is used for 98% of Social Security and Veterans benefits.

If you move residence, you must notify the United States Postal Service, their employers, and the IRS. To tell the IRS, send a Form 8822 by email. If you’ve purchased health insurance, you should also notify your insurance provider about your change of residence, especially if your new address is outside the area your plan covers.

The IRS doesn’t issue refunds before February to taxpayers who claim Earned Income Tax Credit or the Additional Child Tax Credit. Because of the Protecting Americans from Tax Hikes (PATH) Act, it must hold the refund, even if the portion isn’t associated with those credits. Your refund should be available by the first week of March.

Renew your ITIN

If your individual taxpayer identification number (ITIN) expires, renew it immediately to avoid delaying your refund. If you have an ITIN, you can’t obtain a social security number (SSN). Please note that ITINs with numerology 83, 84, 85, 86, or 87 expired in December 2019.

If you have a problem with your ITIN, try to fix it as soon as possible. Failing to renew it before filing a return means the IRS will delay your refund. As a result, you may not be eligible for certain relevant tax credits. To make things easier, keep copies of your statements ready to fill out future reports.

The IRS uses social media ​​to issue updates about tax changes, scam alerts, initiatives, or new products and services. It also has an app called IRS2Go, which you can download for free and use to check the status of your refunds, make tax payments, locate tax help, or watch videos with advice.

Infographic about ITINs
Always keep your ITIN up to date

Tax and Job Reduction Act (TCJA)

In 2017, the federal government passed the Tax Cuts and Jobs Act of 2017, the most critical revision of the tax code in 30 years. 

This law reduced taxes in multiple ways. It cut individual income tax rates (including lowering the highest rate from almost 40% to 37%) and corporate income tax from 35% to 21%. 

The measure also raised deductions for single taxpayers to $12,000, up from $6,350. For couples filing joint returns, the threshold moved to $24,000 from $12,700. 

However, there are also downsides. It eliminated the personal exemption of $4,050 that one person in a household could previously deduct from their tax bill. This measure will expire in 2025.

Many Americans question if they’ve really received the tax break Trump promised them.

Man carrying tax burden
TCJA: helpful or hindrance?

IRS changes and updates from late 2019

At the end of 2019, the government passed some important legislation that affect business owners and non-US citizens 

On December 16, the IRS informed taxpayers it would apply IRC Section 871(m), which stops non-US citizens avoiding tax on US dividend payments by using derivatives. The IRS announced on December 19 that it’s extending the transition relief provided by two years. As a consequence, the regulations won’t apply to non-delta-one payments made before January 1, 2023. The rule against abuse will throughout the transition period.

Passed in December 2019, IRC Section 355(e) ensures distributing corporations recognize the income or earnings from their stocks and securities. It determines if a corporation is a predecessor or successor of a distributing or controlled corporation and provides guidance over the distribution of shares or securities a corporation controls without recognizing income, profit, or loss.

It also issued regulations related to certain financial products that send dividend payments to countries of origin, replacing the treasury department’s temporary regulations.

An income resolution provides different prescribed rates for federal income tax purposes for January 2020. These include the applicable federal rates, the long-term adjusted federal rates, and the long-term tax-exempt rate, and the rate to determine the present value of an annuity.

The third cycle of the 6-year corrective amendment for pre-approved benefit plans began on May 1, 2020, and will end on January 31, 2025. This filing cycle is for providers who submit their requests for pre-approved defined benefit plans between August 1, 2020, and July 31, 2021.

In December 2019, the IRS also passed IRC Section (162)m to limit tax deductions for certain employees with remuneration exceeding $1 million, which is part of the TCJA. For more information, check the IRS written determinations.


Under IRC Section 162(m), eligible taxpayers can defer eligible gross income gains. These regulations also allow them to defer profits invested in a qualifying opportunity fund.

Two businessmen crossing the road in the city
The new regulations will affect many businesses

Federal income tax withholding In 2020

While most people celebrated Christmas Eve, the IRS released the federal income tax withholding methods for 2020. This document explains how to calculate figure withholding using the Wage Bracket Method or Percentage Method.

There’s also information about calculating the cost of federal income taxes for non-resident aliens. However, non-resident alien students and apprentices from India don’t have to follow the procedure.

You can use this information to calculate income tax withholding for supplemental wages unless the 37% flat withholding rate or the optional 22% flat tax applies to you. 

On November 26, 2019, the 2020 percentage method tables for automated payroll systems were released.

However, this doesn’t support W-4 forms from 2020 or released before 2020. You can use the same method, but you only need to base it on annual wages. 

There are also Percentage Tables and Wage Bracket Method Tables for Manual Payroll Systems each year. Withholding must be issued based on a pay period.

Employers can use a new online application called the Income Tax Withholding Assistant. This helps them calculate the withholding using the new W-4 Form for 2020. The IRS isn’t implementing a grace period for the new form, so it’s best to use the calculator 

However, some previously discussed issues haven’t been resolved, like alternative methods for calculating withholding, tables for withholding game winnings for Indue tribal members, guidance for withholding pensions and annuity payments, and new employees who don’t file W-4 forms.

Table with tax and finance info
Learn the new rules about tax withholding

Tax Guidelines for Employers in 2020

The IRS released two tax guides (Publication 15 and Publication 15A) for employers in 2020.

In previous years, this publication included withholding tables for the federal income tax percentage method and instructions for calculating wages, making remissions for amounts withheld, and informing the government about wages and taxes. 

Now, Publication 15-T contains information about income withholding methods and federal income tax methods. 

In November, the IRS only issued the drafts of the retention tables and worksheets, with the amounts adjusted for inflation. The next publication may contain information about withholding methods for the salaries of non-resident aliens.

Publication 15-T also contains reminders of the redesigned Form W-4, Employee Withholding Certificate, and tax withholding. The government reduced the tax-withholding rate to 24% due to tax changes, lower withholding rates on supplementary wages, suspension of reimbursements for moving (except for active military members), and guidance for qualifying tax credits on the payroll of micro-companies.

In October 2019, the salary base for social security for 2020 was $137,700, compared to $132,900 in 2019. The tax rate for employees and employers in 2020 is 6.2%, the same as in 2019.

The tax rate for Medicare employees and employers is 1.4%, the same as in 2019. Employers must withhold 0.9% for the Medicare tax if their employees’ wages exceed $200,000 (or $250,000 for married couples filing jointly).

Group of friendly businesspeople with male leader in front
Employers are responsible for their teams

Bottom line

Once you know how to avoid and combat tax debts, you’re putting yourself in a powerful financial position.

Fortunately, you don’t have to face your debts alone. Consulting a professional is the perfect way to overcome your problems swiftly and easily. At Defensa Fiscal Profesional, we’re experts in everything related to tax and legal advice.

To get in contact, fill out our contact form or visit us at our office at 4801 E Independence Blvd, Charlotte, NC 28212.

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