Taxation is a general concept for devices used by governments to extract money or other valuable things from people and organizations by the use of law. A tax formula contains at least three elements: the definition of the base, the rate structure, and the identification of the legal taxpayer. The base multiplied by the appropriate rate gives a product, called the tax liability, which is the legal obligation that the taxpayer must meet at specified dates.
I know that this may sound technical, but it is important to
understand what tax is in order to avoid tax debt
pitfalls.
The purpose of taxation is to finance government expenditure.
One of the most important uses of taxes is to finance public
goods and services, such as street lighting and street
cleaning.
Some tax questions come up every season, such as the details
behind the earned income tax credit or which education credits
to claim. Other issues come up so infrequently that they raise
even more questions when people run into them, like whether a
foreclosed home is counted as income because the debt was
canceled.
These are the top tax questions tax pros say they get from
filers, and their answers.
1. Does cancellation of debt count as income?
Should you owe money to somebody, whether in the form of
credit card debt, a loan on your home or student loans, and
the debt is canceled, such as having your house foreclosed,
the amount written off is counted as income to you says
Lindsey Buchholz, principal tax research analyst for H&R
Block which says this is one of
the top
tax debt questions it's getting from customers this
year. But you report the debt as income in the year it was
actually canceled.
If you are insolvent at the time of the settlement, meaning
you have more liabilities than assets, then you should not
have to pay any taxes on the forgiven debt.
The publication you want to review is
IRS
publication 4681. You need to read about the exemption
for insolvency.
You need to calculate your net worth and if it’s negative, you
won’t owe any money on your forgiven credit card or other
debts.
Always speak with a tax professional to confirm for your
unique situation.
2. What constitutes earned income for the earned income tax
credit?
Buchholz says people often don't know what counts as "earned
income" and that people also often move in and out of
eligibility for the earned income tax credit, which is why
this tax question comes up year after year as a source of
confusion for tax filers.
The earned income tax credit provides money back to low-income
individuals and families whose incomes fall below certain
thresholds.
Earned income is wages, tips, salaries, self-employment
earnings and some long-term disability benefits. Investment
income does not count as earned income, and if you otherwise
qualify for the earned income tax credit, but have investment
income above $3,350, you're no longer eligible, Buchholz
says.
Interest, dividends, retirement income, Social Security,
unemployment benefits, alimony and child support do not count
as income toward the EITC.
Childless adults can use earned income credit.
Some stories incorrectly referred to the significance of
investment income on the Earned Income Tax Credit. Investment
income does not count as earned income and if someone is
eligible for the credit, but has investment income above
$3,350, they no longer qualify for the Earned Income Tax
Credit.
3. Who counts as a dependent?
This is a common tax question, particularly from unmarried
couples wondering if they can claim a boyfriend or girlfriend
as a dependent, says Lisa Greene-Lewis, Certified Public
Accountant, who monitors the questions on TurboTax, she claims
that people are often surprised to learn that in some
circumstances, they can.
"There are some qualifications," she says. "If you're not a
relative, the person you're trying to claim has to live with
you the entire year. you have to provide over half of their
support, and they can't make over $3,950."
Grandparents can also claim grandchildren as dependents if
they've provided more than half of the kids' support, but the
kids don't necessarily have to live with a grandparent to be
able to be claimed.
4. If I freelance, how often do I have to do my
taxes?
This is one frequent tax question among freelancers, they
often don't realize that they have to submit their taxes four
times a year, says Sara Horowitz, founder and executive
director of Freelancers Union and author of an e-book called
The Freelancers Union Guide to Taxes.
"The federal government wants you to
pay
taxes on your money as you earn it," Horowitz says.
"They don't want you to hold on to it interest-free until the
end of the year." Freelancers have to submit estimated taxes
on Jan. 15, April 15, June 15 and Sept. 15 each year.
5. As an independent contractor, what can I deduct?
"Every year around this time, I get calls related to tax
questions about whether various things can be deducted, like
meals, travel, marketing," says Scott Bishop, director of
financial planning at STA Wealth Management in Houston. When
it comes to being self-employed, the more documentation and
notes you have about your business expenses, the better,
Bishop says.
Typically most
tax questions are related to deductions, in general
you can deduct any expenses directly related to doing
business, whether it's the Wi-Fi in your home office or camera
equipment you have to buy if you're a wedding photographer.
You can't deduct expenses that would be considered optional
for the job or are also for personal use, such as clothes for
an event or a spouse's airfare if they come along on a
business trip.
"Deduct what you think you can deduct, but document it very very well," Bishop says. "If you go for a business meal you want to write on that receipt who you saw and what you talked about."
Your Rights as a Taxpayer
When thinking about taxes many things come to mind but one
thing you should remember is the IRS Taxpayer Bill of
Rights
After researching the tax questions that people ask for the
most I found out that most people do not even know that they
have rights as a taxpayer, Whether or not you agree with the
arguments above, the IRS gives you certain rights regarding
your taxes.
The IRS provides the following ten rights so they can work with you, not against you:
The Right to be Informed
The Right to Quality Service
The Right to Pay No More than the Correct Amount of Tax
The Right to Challenge the IRS's Position and Be Heard
The Right to Appeal an IRS Decision in an Independent Forum
The Right to Finality
The Right to Privacy
The Right to Confidentially
The Right to Retain Representation
The Right to a Fair and Just Tax System
For more information about your taxpayer rights, review IRS Publication 1, Your Rights as a Taxpayer.
Bottom Line
At the end of the day, taxes are like a foreign language to anyone. It is only natural to have questions. Knowing your rights as a taxpayer is important and it may benefit you longer down the road. Should you have trouble with your taxes and have one of the above frequently asked questions, consider consulting with a tax debt professional.
