The best initial defense to a potential IRS tax liability is the preparation of a return that maximizes the adjustments, credits and deductions that are available to the taxpayer. The income tax return, in addition to reporting your income, also allows you to report a litany of adjustments to income, credits and deductions that can drastically reduce your tax liability.
One of the initial decisions vital to the best prepared return is the proper filing status. The IRS allows taxpayers to file their returns as either single, married filing separate, married filing joint, head of household or as a qualifying widower. The tax due on the same amount of taxable income is considerably different with each of these filing statuses. Additionally, the proper filing status can preserve your ability to claim certain credits, such as the earned income credit, and maximize the amount of other credits, such as the child tax credit.
There are a number of adjustments against income that the IRS allows taxpayers to claim. For example, health insurance paid by a self-employed taxpayer, student loan interest paid and a handful of others. Maximizing these adjustments will reduce your Adjusted Gross Income and subsequently your taxable income and total tax.
The IRS also provides a number of credits such as the child tax credit, credits for child care expenses, earned income credit, American Opportunity Credit and additional child tax credit. Maximizing the amounts of these credits can lower the total tax and in the case of the earned income credit, American Opportunity Credit and additional child tax credit, act as payments against the total tax due.
The IRS also offers a bevy of deductions such as itemized deductions, business deductions against self-employed income, deductions against the sale of assets such as stocks or real property and deductions against rental income. In some cases, these deductions can create a net loss which is deductible against other forms of gross income.
Electing to itemize your deductions will give you a greater deduction against your Adjusted Gross Income than you would be allowed through the Standard Deduction. Itemized deductions include medical expenses, mortgage interest, state and local income taxes, real estate taxes and charitable contributions.
Self-Employed individuals can mitigate the amount of their business income that is subject to both income taxes and self-employment taxes by maximizing their business expense deductions on their schedule C.
Individuals deriving rental income can reduce the amount of their rental income subject to income taxes by maximizing the expenses claimed against their rental income on the schedule E.
The capital gain on the sale of assets such as stocks or real property can be minimized based on maximizing the cost basis claimed against the sale of those assets.
As you can see there are a litany of tools available to taxpayers to reduce their tax liability. As such, prior to preparing your return, it is highly recommended that you consult a tax practitioner to assist you in the preparation of your return.
If you are being aggressively pursued by the IRS for failing to file your income tax returns, the attorneys at J David Tax Law can help. We work with Americans in every State.