I Have State Tax Debt! What Are My Next Steps?
You've received a letter from your state tax authority and now you have two choices for settling your tax debt: pay now in full or enter into a payment plan with your state agency. The best way to obtain state tax relief will ultimately be determined by your state and personal financial circumstances.
If you haven't had to pay state taxes in a few years but now have a liability, you may be wondering why you owe state taxes this year. It's a fairly common question to which many taxpayers struggle to find an answer. You might not even realize you owe state taxes this year. It all depends on how your income has changed over the previous year and whether you still have any credits or deductions that you used to reduce your taxes in the past. Keep in mind that each state may have multiple taxing authorities, each with its own set of rules.
State Tax Debt Settlement Options
Remember that the specific requirements and terms of each relief option may differ from state to state. You must submit all required paperwork and records to demonstrate your eligibility for any of these options. Generally, your state will look at your ability to realistically pay back what you owe. While no relief option is guaranteed, almost all taxpayers will be eligible for payment plans that will allow them to repay the tax debt over time.
Installment Agreements: Unpaid tax debts and the penalties for non-payment can be severe. An Installment Agreement might be what you need. This settlement program might allow you to pay off your state tax debt in agreed-upon payment installments with the State Tax Collections authorities.
Currently-Not-Collectible Status: In a scenario where you do not have the finances to pay an installment agreement or submit an offer in compromise, a Currently-Not-Collectible status may apply to you. This is when the State Tax Collections authorities will suspend collection on the taxes that you owe based on your financial condition.
Offer In Compromise: If you meet the criteria, this settlement program might allow you to pay less than the full amount of the state tax liability that you owe. It'll ultimately depend on your income and assets, not to mention, the paperwork is quite intensive.
Why Do I Need To Owe State Taxes But Not Federal Taxes?
Many taxpayers wonder why they owe state tax but not federal. There is a significant distinction between federal and state income taxes. Federal taxes are collected by the federal government through the IRS and used to fund the various functions that fall under the purview of the federal government. Individual states collect state income taxes where the taxpayer resides or has a business.
Your withholdings and deductions for IRS federal tax liabilities may be sufficient to cover them all. You would be eligible for a federal tax refund in that case. Even if you have paid your federal taxes, you may still meet the threshold at which your state begins charging tax. Even if you don't owe the IRS any federal taxes, you may owe the state at the end of the year.
Unlike the IRS' 10 year statute of limitations, each state has its own implementation of statute of limitations which can range from a couple of years all the way up to 20 years. This means you may have to owe the state more taxes than the IRS if you've been collecting interest and penalties.
What Potential Factors Contribute To My State Tax Debt?
Other factors that may contribute to your state tax bill in 2022 include:
Social Security, if this was your first year receiving benefits
Increase in taxable income because you didn't contribute to an individual retirement account
Change in filing status, changes in education, or tuition deduction
Increase in-home or property tax
One-off capital gains
Change in military service
State Tax Debt Overview
If you are unable to pay your state taxes, the most important action you must take is to pay your amount in full but in a case where you cannot, you must get into a payment plan with the IRS that lets you pay your tax liabilities over a period of time. The IRS Fresh Start Program consists of 4 main programs that are accessible to taxpayers who owe much more than they can reasonably afford to pay. The four major programs are as follows: Currently Not Collectible (CNC) Offer In Compromise (OIC), Installment Agreement (IA), and Penalty Abatement (PA).
These relief programs from the IRS Fresh Start Program allow qualified taxpayers the option to reduce or even eliminate their tax debts. These tax experts will help you qualify for the program and help you figure out which options will give you the most suitable outcome. Especially if the agreed amount from the installment agreement that you've previously set up with the IRS is a bit harder to pay off these days. It is very important for taxpayers to remain tax compliant because it will save you interest and penalties on the current year and prevent you from a continuous circle of always owing tax.
Resolve Your Tax Bills
If you've found yourself in a nasty mess with the IRS, take a deep breath. For taxpayers who may have difficulty paying off an excessive amount of tax debt, there's a new and improved relief program that consolidates many major relief programs into a one-size-fits-all assistance program. Any issues regarding back taxes, unfiled years, or any other tax-related problems may be solved through one program; the IRS Fresh Start Program!
See If You Qualify For The Fresh Start Program Today!
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