Nicolas Cage once had $150 million to his name, thanks to his big-ticket roles in National Treasure and Leaving Las Vegas, among others. But, after squandering it on a private island in the Bahamas, a haunted mansion in New Orleans, two castles in Europe, and 15 estates, the IRS presented him with a whopping $6.3 million in property taxes. Even after paying off those taxes in 2012, the 57-year-old actor still has to take on more roles to pay off $14 million in other taxes.
It’s easy to get complacent when endowed with a fortune. Most forget that everything in the world carries some form of tax, from your dream waterfront property to that bottle of soda on aisle four. Reckless spending is an excellent way to accrue tax debt, and Americans accrued over $500 billion last year. Given the ongoing pandemic, that statistic will likely swell even with stimulus packages and relief programs in place.
Still, it’s important to point out that having tax debt isn’t necessarily a bad thing. It only becomes a grave concern if it’s allowed to balloon out of control. You can lose your property and everything you own to pay off every cent, as Cage has learned (and still learning) the hard way.
Here are some ways to make tax debts more manageable:
- Get Professional Help
Not even Albert Einstein understands how income taxes work (at least that’s what his accountant thought). Doing taxes is one of those enigmas possibly on par with UFOs and the Bermuda Triangle; it’s that incomprehensible. The IRS has been working to simplify the process, but it’s a long, hard road before their efforts bear fruit.
You can do the taxes yourself, but you may miss out on deductions you never thought you qualify for. Consider hiring a professional tax debt relief service to help you with everything involving taxes. These people have studied enough of the tax code to get you through the hassle of tax season and lower the tax you owe.
- Live Within Your Means
Before planning a big-ticket purchase, like a car or house, ask yourself, “Do I need this now?” The right answer to this question depends on your response to another question: “Do I have the means?”
Living within the constraints of your finances is a generally good advice. You’d want cash in reserve for the rainy days, especially with COVID-19 running wild across the country, all the more reason if you have a family. Some practical ways to cut spending include using discount coupons, eating at home, and doing exercises at home.
However, it’s important to clarify that living within your means doesn’t mean avoiding rewarding yourself. If buying that brand new flatscreen TV won’t hurt your finances in the long run, go ahead. If you want to go on a gastronomic tour across America, plan for it ahead of time. In these difficult times, everyone deserves a break that’s still within their means.
- Avoiding Is Not Evading
Tax avoidance isn’t the same as tax evasion. One is a plan to lower taxes by calculating deductions and looking for mistakes, while the other is a method to refuse to pay taxes by not declaring income or making under-the-table deals. Guess which one will get you in trouble with the law.
Under Section 7201 of the Internal Revenue Code, tax evasion is a felony crime and comes with a fine of up to USD$100,000 ($500,000 for corporations), imprisonment for five years, or both. Proving tax evasion involves fulfilling three conditions: a present unpaid tax liability, an apparent attempt to evade said tax, and the person in question aware of their obligation to pay the said tax.
Meanwhile, the IRS acknowledges tax avoidance since the measures still fall within the tax code. There’s nothing illegal about taking advantage of loopholes and shields to offset taxable income. Deductions such as student loan interest and 401(k) contributions, among the most common forms, are a form of tax avoidance.
- Deductions And Credits
The IRS recognizes 19 forms of tax credits and 24 forms of tax deductions for individuals. Taking advantage of as many credits and deductions as possible lowers tax debt significantly. Some of the most widely-used include:
- Student loan interest deduction – up to $2,500 for paid interest in student loans
- American Opportunity tax credit –the first $2,500 spent on tuition, books, equipment, and other school fees
- Earned income tax credit –for people with adjusted gross income (AGI) below USD$57,000
- Medical expenses deduction –unreimbursed medical expenses greater than 7.5% of AGI
- 401(k) contributions deduction –up to $19,500 of contributions annually (USD$26,000 for 50 years old and above)
- Residential energy credit –up to 26% of the installation cost of solar energy systems
- State and local taxes deduction –up to $10,000 ($5,000 for married separate filing) for property taxes and state or local income and sales taxes
- Child tax credit –up to $2,000 for a dependent child or $500 for a non-dependent child
Keep in mind that this is a simplified list, as each credit and deduction comes with their respective conditions. Check the IRS official website for more details.
- Stay Safe
The current pandemic has forced many Americans to spend on healthcare items, such as face masks and hygiene products. Such expenses came at the wrong time, when quarantines have left people unable to work, hence, no income. Fortunately, the Consolidated Appropriations Act, signed before the end of 2020, offered a slew of tax breaks, some of which include:
- Medical expenses deduction will remain at over 7.5% of AGI for the foreseeable future
- Extension of deadline for mortgage insurance premium write-offs throughout 2021
- Non-itemized charitable deductions doubled to USD$600 (from USD$300) for joint-filing couples
- Residential energy credit of 26% of solar energy installation costs extended up to 2022
As one quote goes: “Nothing is certain in this world except death and taxes.” Then again, it’s unfair to portray taxes in a bad light; taxes are what keeps electricity running and hospitals open in these difficult times. Paying what you owe your country goes a long way in helping everyone get through thick and thin.
Pay your taxes. Don’t wait for the IRS to send you the bill.