1. When You Can’t Pay Tax Debt
Three popular IRS tax relief options to help you pay off tax debt are installment agreements (streamlined, non-streamlined, guaranteed, or partial payment), Offer in Compromise (OIC), and Currently Not Collectible (CNC) status.
Installment agreements
These monthly IRS payment plans that can be short-term (less than 3 months) or long-term (up to 72 months). How much time you have to pay and your monthly payment amount depend on how much you owe and what the IRS calculates you can pay each month.
Offer in Compromise or OIC
An OIC payment plan lets you settle a tax debt for less than what you owe the IRS. For example, if you owe $15,000 in back taxes, the IRS may accept a lump sum offer of $1,200 paid within 5 months.
What offer the IRS will accept is unique to each person’s situation (i.e., their personal income, assets, and monthly expenses).
CNC Status
If you can’t make any tax payments at all due to financial hardship, the IRS will consider giving you CNC status. This temporary status pauses IRS collection actions until your finances improve.
2. When You Can’t File on Time
If you can’t file your return by the April tax deadline, you can request an extension from the IRS. You can then have 6 more months to file in October. However, requesting an extension does not give you more time to make tax payments.
It’s best to estimate taxes you owe and pay in April to avoid penalties and additional interest. For example, if you estimate you’ll owe $1,000 but can’t file your tax return by April 15, pay the IRS $1,000 before then so they don’t add penalties and interest to your balance.
3. When You Have Penalties
Here are three options for relief from IRS penalties:
First-Time Penalty Abatement (First Time Abate)
First Time Abate (FTA) relief can be applied to penalties for failure to file, failure to pay, or failure to deposit. To qualify for FTA, you can’t have any other penalties or non-compliance issues with the IRS for the past three years.
Reasonable Cause
The IRS may reduce or waive your penalties for not paying taxes or failing to file on time for “reasonable cause.” Examples of reasonable cause are a serious illness, death in the family, or other unexpected life events beyond your control.
Administrative Waiver
Sometimes, the IRS may waive penalties even when you don’t show a reasonable cause. Administrative waivers are more commonly given for hardships after natural disasters or other unforeseen and dire circumstances.
4. When You Live In a Designated Disaster Area
When you live in an area impacted by floods, hurricanes, wildfires, or other natural disasters, the IRS often extends deadlines for filing/paying and/or waives penalties. However, if you already owe back taxes at the time of a disaster, the IRS won’t reduce or waive penalties for that debt.
5. When You’re Low-Income
The Earned Income Tax Credit (EITC) is a tax break that provides a larger refund if you’re a low-income earner who’s single or married with dependents.
For example, a single mother with two children making $45,000 may be eligible for an EITC of $6,604. Married couples with joint returns making $60,000 may be eligible for an EITC up to $7,430.
6. When You’re a Parent or Caretaker
The Child and Dependent Care Tax Credit (CDCTC)
The Child and Dependent Care Tax Credit (CDCTC) for parents and caretakers is 20% (AGI more than $43,000) to 35% (AGI less than 15,000) of care expenses up to $3,000 for one qualifying dependent or $6,000 for two or more dependents.
Keep in mind that if your work pays for any of the childcare or dependent care then you must subtract that amount from expenses. Submit Form 2441 to the IRS to claim the CDCTC credit.
The IRS considers a qualifying dependent as children under 13 years old or spouses who can’t care for themselves either physically or mentally.
If you take the dependent care tax credit for a disabled spouse, that spouse must have been living in your home for at least six months of the tax year.
Child Tax Credit (CTC)
Separate from CDCTC, the Child Tax Credit (CTC) helps offset the costs of basic needs like housing, food, and clothing for children younger than 17.
If your modified adjusted gross income (MAGI) is less than $400,000 (married filing jointly) or less than $200,000 (other filing statuses), you can take a $2,000 CTC credit per child. Use Schedule 8812 to calculate your Child Tax Credit.
7. When You’re a Student
American Opportunity Tax Credit (AOTC)
The American Opportunity Tax Credit (AOTC) is up to $2,500 if you’re an undergraduate student to help pay for tuition, books, and other school-related expenses.
To qualify for AOTC, you must be a part-time or full-time undergrad enrolled in a certificate or degree program. Grad students cannot take the AOTC.
The Lifetime Learning Credit (LLC)
The Lifetime Learning Credit (LLC) can also help you pay for higher education expenses. However, students can claim the LLC for an unlimited number of years. LLC offsets costs associated with both undergraduate and graduate courses and courses taken to enhance job skills.
For example, someone who is working for a software company may qualify to take the Lifetime Learning Credit if they enroll in online courses to improve their knowledge of computer programming.
8. When You’re Saving for Retirement
The Saver’s Credit is 10% to 50% of your IRA, 401(k), or other employer-sponsored retirement plan contributions. How much you can take depends on your filing status and AGI.
For example, if you’re married filing jointly with an AGI of $47,500, you can take 20% of your contribution. If you contribute $1,000 for retirement, your Saver’s Credit amount is $200.
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