February 4, 2021

A Tax cut is considered a very broad term but is typically defined as when the government reduces the amount of taxes that they are collecting. In most cases, tax cuts alter or completely change the preexisting tax laws that are in place. Here are several ways tax cuts can directly affect you.

Reducing income tax rates

The U.S. Congress and a variety of states offer a periodic reduction in the income tax rate as a way of reducing the total income taxes which allow taxpayers to benefit from it. As of 2020, the lowest rate of tax the U.S. government can charge a taxpayer is 10 percent. If the government decides to change it to 8 percent, then this would be considered a tax cut.

Temporary tax cut

Should it be deemed necessary, the government has the ability to cut taxes to a specific amount in order to stimulate the economy. The tax cut would be corrected once the government believes that it’s no longer necessary. One way a tax reduction can be done is through the social security tax rate or if Congress allows those who receive unemployment compensation to exclude a certain amount

Increasing deduction limits

Most deductions that are claimed have limitations in the amount that can be deducted or the maximum income earned that is eligible to be claimed.

Expanding tax brackets

A progressive system of taxation usually involves expanding tax brackets, which is a practice typically used by most governments. A variety of income tax rates are applied to specific ranges or brackets of income. Rather than creating a tax cut with a reduction in tax rates, it would be based off the range of income that is earned in a household to determine the amount an individual will be taxed.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.