U.S. tax law is an arm of business law that deals with matters involving the state and federal revenue services. The most common types of taxes people pay are federal and state income tax, sales tax, excise tax, and property taxes. You may be required to pay more or different taxes depending on where you live. If you're facing a tax lien, made a mistake on your tax forms, or need legal guidance handling estate taxes for a family member, hiring a skilled tax attorney can help you face the IRS.
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UPDATED: Aug 19, 2021
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- Tax laws are federal, state, and local laws that regulate taxation
- Tax law practice is a highly specialized area of law
- Tax complications can arise in both civil and criminal proceedings
- Failure to file tax returns is the most common federal tax crime
People who decide to ignore their tax bills will quickly become acquainted with a tax attorney. The Internal Revenue Service (IRS) and the state taxation agencies don’t mess around. If you don’t pay your taxes, you can bet that an auditor will come knocking on your door.
While many lawyers may have general tax law knowledge, they won’t be able to help people who are in tax jeopardy. If you’re facing the IRS, hire a tax attorney with specialized knowledge in different areas of tax law and the experience to help people in multiple areas of tax law.
Whether someone has not paid their taxes and needs criminal tax law defense, or they’re looking to reduce their taxable income by making gifts and contributions, a taxation law attorney can help. Use our free legal tool to find an affordable tax law firm in your area.
What is tax law?
U.S. tax laws are an increasingly complex arm of business law and span all levels of government. On top of the complicated federal tax law code, most states have additional tax laws, and so do some municipalities.
What are the most common taxes?
We certainly don’t have any shortage of taxes in the U.S. and it’s hard to avoid going even a day without encountering some type of tax.
Because taxes are levied nearly everywhere in the U.S., it affects how much money you take home. Personal finances are dictated by where you live because state tax laws vary on the amount of taxes residents pay.
While tax amounts vary, you can expect to pay the following seven types of taxes no matter where you live, although how much you pay will depend on your income bracket and your state’s tax laws.
Federal Income Tax
When people discuss taxes, this is generally what they mean. The IRS through the Internal Revenue Code levies a federal income tax on every working person in the U.S.
For most people, this is what shrinks their paycheck. How much your paycheck shrinks depends on several factors, including:
- Your filing status
- The number of dependents you claim
- Your gross wages
The U.S. has what’s called a progressive tax system. That means the more you earn, the more you’re taxed. But not on your full earnings — only on the amount of earnings in a new tax bracket, of which there are seven:
Unfortunately, tax law is constantly changing. These numbers and the range of salary subject to each tax bracket will inevitably change every few years. This makes future planning difficult for individuals and families.
If you know that you’ll pay a lower tax rate in the future or retirement, you can make adjustments today to defer your tax to later when you’re paying a lower tax rate. That’s why the skill of a trusted tax lawyer can come in handy when planning for your future.
State Income Tax
The majority of states levy state income tax, just like the federal government levies federal income tax. For those who live in states that have a state income tax, that’s just more money taken out of your paycheck every week.
Some states have a progressive tax system, just like the federal government. Other states, however, have decided to go with a flat tax rate where everyone pays a flat percentage of their income.
States with a flat income tax rate are:
- North Carolina
New Hampshire may be on this list but it may also live on another list. New Hampshire is a bit of a hybrid tax state, completely different from all other states. New Hampshire taxes at a flat tax rate but only on dividends and interest income, though this tax is set to go away.
States without a state income tax are:
- South Dakota
The lucky residents of these states only have to worry about federal income taxes come April. They also may have less deducted from their paychecks and take more money home each week because they’re paying fewer taxes.
Be aware that local communities may also levy taxes on residents. Some counties and cities around the country levy local income taxes on residents. Your tax lawyer can help you make sure that you’re paying these taxes correctly and avoid trouble.
On top of income taxes, the federal government also takes payroll taxes. The Federal Insurance Contributions Act (FICA) is a federal payroll tax taken out of your paycheck to cover your Social Security and Medicare contributions.
Your payroll provider automatically calculates your deductions based on 7.65% of your gross wages. Your employer pays an equal amount, for a total contribution of 15.3%.
Nearly one-third of all Americans today are self-employed. Being your own boss can be fun and exciting, but it also comes with the challenges of running your own business. That FICA tax above where you and your employer split the 15.3% — when you’re self-employed, you pay the whole amount.
If you’re self-employed and have set up a corporation, you may owe corporate taxes in addition to your personal taxes. There can be tax benefits to setting up a corporation so it may be in your best interest to do so. To find out for sure, speak with a trusted tax lawyer.
If you purchase any real estate, you’ll quickly learn about property taxes. Generally collected by the tax collector in your city or county, the amount of property taxes you owe will depend on where you live and the value of your home and property.
That depends on your state tax laws, but governments may levy property taxes on mobile homes and vehicles, including boats, aircraft, and more.
Whenever you buy an item for ten dollars, you end up paying more than that because of sales tax. These taxes vary dramatically from location to location and can be levied by a state, county, or city.
Not every item may be subject to a sales tax, either. For example, some locations do not tax food items.
Excise taxes, unlike sales taxes, are usually built into the price of the item you’re purchasing. Excise taxes are often levied on:
- Airline tickets
- Phone service
- Sugary drinks
- Gambling winnings
These taxes are placed on certain items because they often involve more than one tax. Combining it all into one excise tax makes it less confusing for consumers.
Now that you are familiar with the seven most common types of taxes you’ll encounter daily, it’s time to look at taxes that will only affect you at certain times in your life.
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How do taxes affect estate planning?
The process of estate planning involves many complex decisions on your part. The knowledge and skill of an experienced tax lawyer can help protect your assets from liability and taxes. No one can avoid paying all the taxes associated with your estate, but with the right planning, you can work to minimize some of your tax liability.
When a person dies, their assets may be subject to estate taxes. With proper planning now, you may be able to avoid paying some or all estate taxes, leaving a larger amount to your heirs.
At present, the U.S. estate tax only applies to estates worth $11.7 million or more.
This amount has changed in the past and will certainly change again in the future. It has gone both up and down, depending on many factors, including who’s in the White House and which party has a majority in Congress, but most Americans will not be subject to the estate tax.
Besides that, many states have been repealing their version of the estate tax, though there are still twelve states plus the District of Columbia that tax estates.
There are many tools at your disposal to reduce the value of your estate, including trusts and insurance policies. The relationship between federal estate tax and federal gift tax is one way to actively reduce the value of your estate while you’re alive. By giving money away as a gift or donation, your heirs can avoid paying hefty taxes after you pass.
Giving money away might not sound like good financial advice. However, it has benefits in the long run.
The individual giving money or other items of value to another person, usually a family member, is the one who files and pays the federal gift tax. Gift taxes range from 18% to 40% of the gift value.
Here’s the good news — you can give away up to $15,000 per year to a single person and as many people as you want, tax-free.
Any gift made to a spouse or to another person to cover medical expenses or tuition is not subject to a gift tax, either.
Gifting money can be a great way to reduce your overall tax liability. To make the most of your strategy, hire a U.S. tax lawyer who can walk you through every option you have at your disposal.
How to Avoid an IRS Audit
According to the IRS, a tax audit is simply a review and examination of your personal accounts and information. That makes it sound much more pleasant than it might be in reality.
To make you feel a little better, your chances of receiving a tax audit are fairly slim. Even if you are audited, you may be able to complete the entire process via mail.
But that doesn’t mean you should take actions that make it more likely for you to get audited. The IRS conducts audits to cover the gap between what the IRS expected you to pay and the amount you actually paid.
Luckily, you can learn how to avoid an IRS audit by looking out for the following mistakes commonly made on tax forms. If you do get a knock on your door, make sure you call a tax lawyer right away.
Miscalculations and Tax Audits
Don’t make math mistakes. Not only would it disappoint your seventh-grade math teacher, but it could also result in the IRS auditing your taxes.
Mistakes happen but make sure you look your tax return over more than twice before you file it. If you make a mistake, you may be hit with fines and penalties. The IRS doesn’t care if you made an innocent mistake.
Not Reporting Income
This is a big one that can get you caught pretty quickly. The IRS receives documentation of your income from the same sources you do:
- Your employer
- Retirement account dividends
- Investment gains
Each of these organizations provides the IRS with the total amount of money you earned during a given year. If you don’t include this on your tax return, the IRS will know about it and may come knocking on your door for more money.
Excessive Charitable Donations
Contributions to charity, both cash and items, are good for the community. They may also provide a break on your taxes. But don’t report false donations.
If you can’t prove that you gave $400 worth of clothes to a charity, don’t put it on your taxes. You will need a receipt and valuation for that donation. Don’t have either? Don’t try to get a tax break for it.
Too Many Self-Employment Expenses
Many more people today are self-employed than have been in the past. If you are your own boss, it can be tempting to hide income by categorizing personal expenses as business expenses.
But if your self-employment business grossed $50,000, and you had $45,000 in expenses, that’s a red flag.
Not only would that mean you’re not really making much money and might want to reconsider your business, but it also gives the IRS a clear reason to look deeper into your finances and figure out if that case of wine was really a business expense.
Invalid Home Office Deduction
Along with self-employment income, another great deduction for the self-employed is a home office deduction. But the IRS looks closely at home office deductions because they narrowly define the tax break.
To qualify for a home office deduction, you must use an entire room of your home or apartment exclusively for business purposes. That means your home office cannot be a second bedroom. It cannot be used for the storage of personal items unrelated to your business. The IRS is quick to jump on people for trying to take this deduction when they clearly don’t meet the criteria.
Failing to Report Gambling Winnings
We’re not talking about professional gamblers here. We’re talking about you playing the slots for a weekend in Vegas or going with your friends to Atlantic City for an evening of blackjack.
When you win any money gambling, you need to report it on your personal income tax. The casino will report large winnings to the IRS so they will know if you don’t report it. The larger the winnings, the more likely you are to lose it all if you don’t report it.
What can I do if I’m in tax trouble?
Not every call from the IRS will mean you’re headed to jail, but a call from the IRS will certainly make any ordinary person anxious.
Your first step is to speak with an experienced U.S. tax lawyer. You need a legal advocate on your side who understands complex tax law and what the government agency might be looking for from you. They may also be able to help you quickly settle any tax debt, getting you through this traumatic time quickly.
While you may need to get some help from your accountant or finance professional, they do not have the same obligation to keep your information confidential that a lawyer does. Anything you say to your tax lawyer or confide in them is kept in the strictest confidence. Everything you tell them will stay between you and your lawyer and not get to the IRS or the court.
Depending on the reason for your tax trouble, your lawyer may recommend different avenues for relief. Besides holding attorney-client privilege, your tax lawyer will know all the programs you might qualify for and can help you determine which is best for you to get out of your tax situation.
What is a tax lien?
The IRS can levy a tax lien against your personal or real property for taxes you owe. But just like you might make a mistake on your tax return, the IRS might make a mistake, too.
Your tax lawyer can help you discover any mistakes and aggressively work to remove the tax lien. Without a lawyer working to protect your rights, you risk losing your property if you don’t pay the IRS the money they seek.
What are offers in compromise?
An offer in compromise is one way to eliminate tax liability. It’s essentially a settlement agreement with the IRS.
To present an offer in compromise to the IRS, you need to show:
- You owe the debt
- You cannot pay the debt in full because it would create financial hardship
This sounds simple, but this offer needs to be convincing to the IRS to have them accept it quickly. They have up to two years to accept or reject your offer. You don’t want to wait that long. The right tax lawyer can help draft an enticing offer in compromise and try to help move this process along much faster.
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When should I hire a tax attorney?
You face taxes every day. From sales tax to property and income taxes, you can’t avoid it. But you can plan for it. And that’s one area where a skilled tax lawyer can help you.
The other prime area for tax lawyer guidance is helping you overcome tax trouble. The IRS may frequently take its time but it is a methodical and determined government agency.
If you have skirted the rules on your tax returns, expensed too many purchases to your business, or given too much money away to the point that you have a tax burden on those payments, a U.S. tax attorney should be your next call.
The IRS takes violations of the tax code seriously, and they pursue violators with vigor. Any person or corporation facing an audit or possible criminal or civil penalties is well advised to seek immediate assistance from a taxation attorney to minimize the effects of any civil case or criminal prosecution.
With an aggressive legal advocate on your side, fighting to protect your rights, you can get through your tax challenges and move on with your life. Use our free legal tool below to hire a tax law attorney in your area.