Taxation

Whether you’re paying for preschools, summer day camps, after-school programs, or daycare, childcare expenses can take up a large slice of your income. The good news is, that the IRS enables you to offset some of these expenses through the Child and Dependent Care Tax Credit. Let’s see what it is and how it can help you save up on your childcare expenses as well as your tax bill. When it comes to reducing your tax bill, understanding tax deductions is important. The Child and Dependent Care Tax Credit is one such federal tax benefit that’s designed to provide financial relief to families who pay for the care of a child or dependent while they work, look for work, or attend school. This credit can be applied to a wide range of care expenses, including daycare centers, in-home care, and summer day camps for children under the age of 13. This credit helps in efficient tax planning and helps you reduce the amount of taxes you owe. Eligible taxpayers can claim this credit when they file their year-end returns. The CDCTC can be claimed by both married and single taxpayers. Who Qualifies for the Credit? You qualify for the Child and Dependent Care Tax Credit, if you provide: What is the Eligibility Criteria? How Much is the Child and Dependent Care Tax Credit Worth? Aspect Details for One Qualifying Person (Child/ Dependent) Details for Two or More Qualifying Persons (Children/ Dependents) Maximum Eligible Expense $3,000 $6,000 Percentage of Expenses Covered 20% – 35% 20% – 35% Maximum Credit Value Up to $1,050 (35% of $3,000) Up to $2,100 (35% of $6,000) Income Considerations Higher income = lower percentage (down to 20%) Higher income = lower percentage (down to 20%) The amount of tax credit you can claim varies based on your income and the number of dependents in your care. Here’s a breakdown of how much the credit is worth: How is the Credit Calculated? The amount of the Child and Dependent Care Tax Credit is based on a percentage of the qualifying care expenses. The percentage varies depending on the taxpayer’s income but generally, it is calculated as: What Expenses Qualify? The credit can be applied to a variety of work-related care expenses, including: However, it’s important to note that overnight camps do not qualify for this credit, as they are considered non-work-related expenses. Similarly, care expenses during leisure do not qualify for this credit. For example, the salary paid to a babysitter to watch your kids while you go out for dinner does not qualify for child and dependent care tax credit. That’s because this babysitting fee didn’t help you to work. Is the Child and Dependent Care Tax Credit Deductible? No, the Child and Dependent Care Tax Credit is not deductible. Instead, it is a tax credit and directly reduces the amount of tax you owe, dollar for dollar. Unlike a deduction, which only reduces your taxable income, a tax credit is applied to your actual tax liability, making it more valuable in reducing your overall tax bill. This means if the credit is more than your tax liability, you cannot receive a refund for the difference. For example, if you owe $2,000 in taxes and qualify for a $1,000 Child and Dependent Care Tax Credit, your tax bill would be reduced to $1,000. This credit can provide significant relief for eligible taxpayers, especially those who have substantial child or dependent care expenses. How to Claim the Credit? Claiming the Child and Dependent Care Tax Credit requires some extra paperwork. You need to complete Form 2441 and submit it with your Form 1040. However, claiming this tax credit may affect your ability to claim other tax credits and vice versa. That’s why it is important to consult a Tax Expert before filing to check on the other alternatives and benefits available. Professional tax consultants can help you maximize your credits while staying compliant with all tax regulations. Need help navigating the complexities of tax credits? At Knowvisory Global, we can help you understand your eligibility requirements and guide you on ways to maximize credit and minimize IRS tax penalties. We handle all your paperwork, so you can focus on what matters most! Contact us today and make the most of your tax benefits. We can help you stay sorted and prepared for the upcoming tax season.

Do you think your work ends with filing your tax returns? It may not. In this article, we delve into the types of issues you could face as a taxpayer even after filing your annual returns and how to resolve them. The IRS routinely conducts tax audits to augment its tax collection efforts. If they find any discrepancy in your return, they could send you a notice asking for quick remedial action. That’s why accurately filing your tax return is important! Here are a few reasons why the IRS could send you a notice on your tax return and what you can do to save yourself from hefty fines and penalties. Types of tax problems Tax penalties We already took a deep dive into different types of tax penalties you could face a few days ago. The tax authorities could seek a penalty if you have made a mistake in filing, reporting, or paying taxes. The typical consequences are that you may be asked to pay a fine and rectify the return. As we saw earlier, over 80% of such notices are for failing to pay taxes or for paying an incorrect amount. How to resolve it? Several remedial measures are available, including appealing for a reduction or waiver of penalty with the help of tax experts, if needed. Unpaid taxes If you have forgotten to pay your taxes or paid less than the specified amount, you can be hit with a 0.5% penalty for every month. Any balance to be paid is also subject to interest. If you fail to address the situation, interest and penalty will continue to accumulate. How to resolve it? Some options available include a long-term payment plan that allows you to pay the taxes in monthly installments without the added burden of interest. Alternatively, you can explore an offer in compromise. Math-error notices Filing taxes can be a complex affair, especially if you are doing it by yourself. There is a lot of scope for simple computational errors, missing entries, and incorrect values. In many such cases, the IRS corrects the error and processes the return without you having to do anything. However, in some cases, they may send you a notice requiring action on your part. How to resolve it? Solutions depend on the kind of math error reported. You may need to pay more taxes or receive a refund where applicable. Non-filing of taxes You will receive an IRS notice if you have missed the tax filing deadline. The notice could demand a penalty for non-filing of returns if the tax authorities deem it fit. How to resolve it? Filing returns is essential to resolve this issue, with a full payment of taxes owed where applicable. Underreported income If you have failed to declare any income, this is considered underreported income and the IRS can send you a notice to remedy the situation. This happens when the income reported on your tax return fails to match with income consolidated from third-party sources. How to resolve it? Additional payment of taxes and/or penalties may be needed to remedy this notice. If in doubt, consult a Tax Expert for advice. This is not an exhaustive list of tax problems you could face after filing your return. If you get a tax notice, the best thing to do would be to work with the authorities and/or Tax Experts at KnowVisory and resolve it at the earliest. Whether you need expert advisors to aid decision-making or help in preparing your returns, Knowvisory’s Tax Planning & Return Preparation services are here to help. We can help you understand your tax deductions, and liabilities, and optimize your tax strategy for maximum savings and benefits. Contact us today and get expert help in filing your tax returns.

Applying deductions can help you reduce your tax bill. In this article, we help you understand what type of deductions to choose. Did you know that as a taxpayer, you can reduce your tax bill in some ways? Let’s start with the basics. Your income tax is calculated on your Adjusted Gross Income (AGI). However, the IRS allows you to claim certain deductions from your AGI, to help you reduce your tax burden. You can either claim a standard deduction or choose to itemize the deductions if you believe that your actual expenses may be higher than the standard deduction. Let’s break it down for you. Standard Deduction The standard deduction is a flat reduction in your Adjusted Gross Income stipulated by tax authorities. This amount is fixed by Congress and changes year on year, usually getting bigger. The standard deduction amounts per the IRS for the 2023 tax year are: Single or Married Filing Separately – $13,850 Married Filing Jointly – $27,700 Head of Household – $20,800 Itemized Deductions The IRS allows certain categories of expenses to be deducted from your AGI that decreases your taxable income and therefore, your tax bill. When you choose to itemize your deductions, you can pick from a list of individual deductions instead of opting for a flat reduction. Types of Itemized Deductions The IRS provides a wide range of permissible expenses that can be deducted from your AGI to reduce your tax bill. We list some of the most common itemized deductions. Unreimbursed Medical and Dental Expenses If you have spent any money for medical or dental treatment for yourself or immediate family members, it may qualify as an itemized deduction if the total out-of-pocket spend exceeds 7.5% of your AGI. You can either claim this when the treatment is provided or when the expense is incurred. The amount to be claimed during the year is the amount paid (by cash/check or credit card) less the reimbursed portion by the employer/insurance company, only to the extent it exceeds 7.5% of AGI. Interest Expense 1.    Home Mortgage Interest If you are a homeowner, you can claim deductions for the interest expense incurred either for your main or second home. Loans of up to $750,000 secured by the home and used to buy, build, or substantially improve taxpayers’s homes are deductible only to the extent paid and related to the current period. This is applicable if you are filing taxes jointly with a spouse. In case you are filing as an individual, this cap is reduced to 375,000. 2.    Investment Interest Expense Interest paid or accrued on a loan or part of a loan that is allocable to property held for investment (Property that produces income from interest, dividends, or annuities; provided the income is not derived in the ordinary course of business. It includes interest expense from Schedule K-1 received from S-Corp, Partnerships, estates & trusts. Interest expense to purchase tax-free bonds is not deductible. Unused may be carried forward indefinitely. 3.    State & Local Tax (SALT) Deduction The SALT (State and Local Tax) deduction allows taxpayers in the United States to deduct certain state and local taxes, such as property taxes and either income or sales taxes, from their federal taxable income. However, the Tax Cuts and Jobs Act of 2017 capped this deduction at $10,000 4.    Charitable Donations  Good deeds can fetch you some tax benefits too. If you have donated to a qualified domestic organization, you can claim up to 60% of AGI. Contributions can be paid in the form of cash/check or Property. How to Choose Between Standard and Itemized Deductions? Running tax calculations with both options is a good idea when you are faced with the decision of whether to itemize your deductions. If the total value of itemized deductions is higher than the permitted standard deduction for the tax year in question, then you can choose to itemize. How Does It Help to Itemize Your Deductions? As we said before, itemizing deductions may add up to more than the standard deduction permitted by law. The more you deduct, the less you pay in taxes. If you think your expenses under some of these categories could exceed the standard deduction, itemizing deductions can be advantageous. Are There Any Disadvantages? Like for everything else, itemizing your deductions is more time-consuming and can mean that you spend more time on your tax return. The rules can be confusing and you will need to understand them in depth to be able to maximize your tax savings. Additionally, it is a good idea to keep documentary evidence for all deductions you are claiming as the IRS may choose to audit your return at any time. Make an Informed Decision! Whether you choose to claim standard deductions or itemize them, do your research, understand the tax laws, and run simulations before making a decision. Connect with expert advisors for informed decision-making. By consulting with professionals, you can ensure that you maximize your tax savings and comply with all relevant regulations. Don’t leave money on the table—take the time to evaluate your options and leverage Knowvisory’s Tax Planning & Return Preparation services to make the best decision for your financial future. Contact us today for expert guidance and start optimizing your tax strategy now!  

Who doesn’t find filing tax returns a daunting task? We decode penalty clauses for you and help you avoid or reduce tax penalties. More than half of all penalties imposed are for not paying taxes on time. But hold on. Even if you do pay taxes on time, but have missed a tax filing deadline, you can still receive a penalty notice. Why might I receive a penalty? Here are some reasons why the IRS might send you a penalty notice. There are several reasons why you may be asked to pay a penalty, but these are some of the most common ones. But wait, all is not lost. There are ways in which you can legally avoid or reduce tax penalties. In this article, we simplify complex tax laws and help you understand what you need to do to reduce your tax liabilities. Before we dive into the remedial actions for reducing tax, let’s take a minute to understand the most common reasons why you might be asked to pay a penalty. Failure to Pay The IRS usually requires you to pay the tax by the April deadline. When you fail to meet this deadline, the IRS can levy a penalty. This penalty is usually 0.5% of the tax you owe per month or part of a month, but it also caps at 25% of the tax due. One way to minimize your penalty is to ensure that you pay your tax in full by the April deadline, even if you request an extension. Failure to File The Failure to File penalty applies if you don’t file your tax return by the due date. The Failure to File penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late. However, the penalty won’t exceed 25% of unpaid taxes. If both the late filing and late payment penalty apply to a particular month, the late filing penalty is reduced to 4.5%, so the maximum penalty is 5% pm. Failure to pay proper estimated tax The IRS expects that you will pay taxes throughout the year, rather than at the end of the year as a lump sum. To facilitate this, it sets quarterly deadlines (April, June, September, and January). You can calculate tax and adjust the amount deducted from your paycheck as you go to help reduce your penalty. The requirements are that you pay: Dishonored check If you issue a check to the IRS and you do not have enough money in your checking account, the bank will dishonor or “bounce” your check. The IRS charges a penalty Bad Check Amount Penalty Less than $1,250 The payment amount of $25, whichever is less $1,250 or more 2% of the payment amount A simple way to reduce your penalty is to ensure that your checking account is adequately funded when you issue a check to the IRS. How do I avoid or reduce tax penalties? The IRS itself offers some legal ways to reduce your tax penalties. Let’s take a look at three basic scenarios in which the IRS might agree to reduce your penalties. First-time abate or administrative waiver Are you usually on top of your tax filing responsibilities? Even the most meticulous tax filers miss deadlines sometimes. If this sounds like you, you can file a request for first-time abate. To qualify, you must have filed all your returns, paid your taxes on time, and have no prior penalties for the last three years. Reasonable clause Sometimes, you might fail to pay taxes on time or make an incorrect payment due to a wide range of reasons. The IRS allows you to cite some of these as “reasonable clauses” and request a penalty waiver. Some valid reasons for filing an exemption on a reasonable clause basis are: Statutory exceptions In very rare cases, the IRS also provides statutory exceptions under a certain set of circumstances. If you fall under any of these categories, you can request a reduction/removal of penalties. So, here you are! These are some of the common reasons why you might receive a tax notice from the IRS along with the ways to avoid or prevent it. Whether you are an entrepreneur, a small business owner, or an individual taxpayer, staying on top of your taxes is not easy. Seek help from our seasoned tax experts and we can guide you step by step. We can help you calculate and file your taxes as well as provide personalized strategies to minimize your liabilities. Reach out to us today for expert help.