Tax planning can be an effective way to manage tax liability. Generally, it’s about using tax allowances in such a way that a greater portion of the liability is reduced. Further, record-keeping is another important aspect of efficient tax management. It requires keeping an adequate and comprehensive record to trace the numbers as and when needed. In this article, we shall discuss five main reasons leading to refund holding and how to avoid it to get maximum tax relief.
1- Child care tax credit
Under the American Rescue plan, there has been a one-time expansion in relief amount for child care for current year. The parents can claim $8,000 for one and $16,000 for two or more children.
However. They need to keep traceable receipts and monetary record.
In recent years, problems were reported with the amount and overall approach to claim child Cared tax credit. To encounter the same, the IRS has been dispatching letter 6419, which contains information related to child care tax credit.
This letter aims to provide customized and reliable information to taxpayers about child care tax credit and create ease in further processing. It's expected to reduce errors and misunderstandings that led to held of refunds in the last tax years.
What is given in the letter 6419?
- Advance received in 2021 by a taxpayer under the child care act.
- The number of children qualified under the child care act.
However, if you have not received advance under child care tax credit, full Relief can be claimed. So, if you follow and reconcile credit details with form 6419, there are higher chances of credit approval fast and efficiently.
2- Stimulus payment
Taxpayers need to ensure an adequate record of tax details is kept. It includes keeping correspondence received from IRS for economic impact payment which may be useful for future reliefs as well.
IRS has been making economic impact stimulus payments to the taxpayers and dispatching form 1444-C. The form should be kept as an important tax document to be used if there is any need in the future. It's important to note that the IRS will not issue a copy of the form that is lost or not received. However, if you want to track amounts of previous economic payments, they can be extracted from an online account.
3- ID verification
IRS has introduced an ID verification system for taxpayers. The verification system aims to enhance security features and provide safe access to the tools and applications for filing taxes. IRS uses Form-5071-C for ID verification purposes.
ID verification enables you to access different functional modules that include child tax credit update portal, online account, get transcript online, Identity protection, online payment agreement etc. To access these online tools, the taxpayer needs to create an account at ID.me. This process requires providing identity proof like state ID, passport, driver's license or any other Government-issued identity.
Further, the verification process is simple and straightforward, leading to completion quickly and easily. However, it’s important to be able to claim using modules and claiming reliefs as mentioned.
4- Healthcare marketplace insurance
Accuracy of data is important while filing taxes. Chances of errors in obtaining healthcare relief can be greatly reduced when you extract information from reliable sources. For instance, the information on Healthcare numbers can be obtained from Form 1095-C. This form provides information about premium paid, premium tax credits used, and the second-lowest-cost silver plan.
It's important to note that this form is provided by the marketplace providing insurance. Further, the information obtained from Form 1095-C needs to be compared with the premium tax credit Form 8962. Hence, reconciliation can be performed leading to identification if there is an error in qualifying and claimed amount.
Likewise, sometimes there can be errors in the details. In such cases, you need to immediately contact the market place and get a correction to ensure a seamless tax filing process. However, you need to ensure things are done fast to ensure the filing deadline is not missed.
5- Inaccurate W2 income reporting
Sometimes, inaccuracies and errors may be a prime cause for the hold of tax benefits. For instance, there may be a delay in filing taxes because of errors and problems in the income record. W2 is a tax form that contains details for the deductions made from paycheck throughout the tax year under consideration. The figures and information are extracted from here and used to calculate tax liability. Hence, if there are errors with this record, it might lead to inaccurate tax liability and allowance utilization.
If you are sure that there are errors in the W2 form, you need to contact the employer and get a correction for the same. Likewise, you can also contact the IRS if there are significant inaccuracies and concerns that your employer is not doing taxes appropriately. In such circumstances, the IRS can directly contact the employer and consider their point of view.
Conclusion
Efficient tax planning can lead to reduced tax liability and overall tax management. However, it's about using the right allowance at the right time leading to maximum credit utilization. It's different from illegal tax evasion and can lead to massive penalties.
So, there is a need to ensure effective tax management while complying with applicable provisions. This article has discussed different aspects of managing tax and related controls leading to quick processing. These controls are based on different reconciliations and Forms issued by the IRS and marketplace providing services.
For instance, Form 6419 is used to reconcile child care tax credit relief. 1444-C form for a stimulus payment. Form 5071-C is used for the ID verification, 1095-A for healthcare insurance, and W2 income form for employment income reporting purposes.
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