What happens when you file your taxes and discover that you owe money to the IRS? What are your options? What about when the amount owed is greater than you can afford at the moment? Luckily, there are several options for both scenarios.
Before we get into the different options for making payments to the IRS, remember that your payment has to be received by the IRS no later than the April 15th tax deadline, or be prepared for IRS-issued tax penalties and interest. This deadline applies to those who filed for a tax extension as well.
Below are the different payment options available to pay the IRS.
If you have the funds available when you file, you can have them automatically withdrawn from your bank account when you e-file and choose the e-pay option. This is available whether you use tax preparation software or an accounting professional to do your taxes.
The IRS has a “Direct Pay” service through its website, where you can pay from your checking or savings account at no cost. In order to track your payment, use the “Look Up a Payment” tool on the website or enable email notifications.
Credit or Debit
The IRS provides three third-party payment processors on its website through which you can pay your balance using a credit or debit card either online or by phone. They do charge a small service fee, which may be tax-deductible, and your credit card company may charge a fee as well.
Check or Money Order
Make checks payable to the United States Treasury and include your social security number or employer identification number, phone number, related tax form or notice number, and the tax year in the memo field. Send your check with a Form 1040-V, which is a payment voucher found on the IRS website, but don’t paperclip or staple your check to the voucher. You’ll find the correct mailing address for your check on page two of Form 1040-V.
Pay in Person
If you want to be absolutely sure that your payment is getting to the IRS on time, you can pay in person at your local IRS Taxpayer Assistance Center, which can be located on the IRS website. You will need to schedule an appointment before you go.
Check with your bank to see if they offer same-day wire transfer payable to the IRS. Be sure to ask about cut-off times and fees for this service.
What if you don’t have the full amount now? Luckily, the IRS offers two installment plans – a short-term plan and a long-term plan – which you can apply for online with the Installment Agreement Request (Form 9465). Which plan you qualify for depends on how much you owe and your specific tax situation. There is an application fee, and once approved the IRS can void the agreement if you don’t stay on schedule with payments.
Another option is to request a temporary delay from the IRS. You might have to fill out a Collection Information Statement and provide transparent information on your personal finances, and penalties and interest will factor in until the amount is paid in full.
Finally, you can offer to settle for a smaller amount than what’s owed, but the IRS encourages taxpayers to consider all other options before submitting an offer to settle. If you decide to go this route, you will need to be current on your tax filings and not involved in an open bankruptcy proceeding. To determine if you qualify, the IRS will take into account your income, expenses, ability to pay, and asset equity.
Mismanaged money, investment duds, a blown budget (or no budget), bad habits, the proverbial hole in your pocket. If financial regrets weren’t a thing, we wouldn’t need the Dave Ramseys of the world, but there’s a difference between splurging on an artisan cup of coffee and making a financial blunder that could have ramifications for years to come.
Some red flags that you’re about to jump into a bad financial decision include needing to justify your rationale, a lack of thorough research and homework, depending on a payment you haven’t received, falling for a too-good-to-be-true scheme, and not paying attention to that internal tugging known as instinct. You might say that you’re effectively ignoring these red flags if you’re tempted by any of the following common financial mistakes that could cause long-term consequences.
Taking a Loan from a 401(k)
Yes, you usually have five years to pay it back, and yes, it’s your money after all, but those who borrow from their 401(k) usually reduce or suspend contributions while they’re repaying the loan. This means they’re going months or even years without contributions, missing out on investment growth and company matches. Not to mention the interest on the 401(k) loan. It’s also a gamble because if you leave your company, the loan must be repaid within 60 days.
Claiming Social Security Early
Waiting until age 70 to tap into your Social Security is your best bet, but it’s generally recommended to wait at least until your full retirement age (currently 66-67). The earliest age to withdraw benefits is 62, but your monthly check would be reduced by approximately 25% for the rest of your life.
Making the Minimum Payment on Credit Cards
With mounting interest costs, it can take years to pay off credit card debt, especially if consumers continue to spend with credit cards while only paying the minimum payment. If possible, transfer the balance to a lower-rate card, and always try to pay more than the minimum payment due. Even a small increase in monthly payments can save you on interest.
Not Saving for Retirement
Unless you’re fresh out of college, you should start saving for retirement yesterday. Don’t think you can wait until you start making more money. According to Morningstar, and assuming a 7% annual rate of return, someone who starts saving for retirement at 25 years old would need to save $381 a month to hit $1 million by the time they turn 65. Compare that to someone who starts saving for retirement at 35 ($820 a month) or 45 ($1920).
Foregoing Professional Advice
Do you have a valid will? Have you legally appointed beneficiaries for your retirement accounts? Financial advisors will help with this as well as anything from taxes and insurance to retirement savings and estate planning.
Refraining from Investing
Sure, there’s risk involved, but by diversifying your investment in a mix of large, small, domestic, and foreign stocks, you reduce the possibility of getting hit with a big loss. Perplexed on where to begin? See “Foregoing Professional Advice” above.
And while your nest egg should keep growing after retirement, most financial planners recommend decreasing risk by gradually pulling away from investing in stocks.
Falling for Scams and Raw Deals
According to the FTC, Americans lost a collective $765 million to telephone, text, mail, email and face-to-face scams in 2015. Requests to wire money; or pay fees before receiving anything; or provide personal information, bank information, or sensitive financial information should be met with extreme skepticism. If you suspect a scam, conduct a quick Google search with any information you have on the product or company, including key words like “scam” or “review”. If your suspicion is confirmed, be sure to file a complaint with the FTC and your local consumer protection office.
March Madness is upon us, and while that term often refers to college basketball, if you’re like the majority of Americans, it can also apply to tax season. The IRS tax deadline will be here before we know it, and while it might be late in the game to do much about lowering your tax bill or increasing your return, here are a few tips to help make your 2019 tax return as smooth, painless, and advantageous as possible.
Max out your traditional IRA
This is the easiest way to lower your tax bill after the end of the calendar year, and you can make contributions for the 2018 tax year until the April 15 tax deadline. Contributions top out at $5,500, or $6,500 for those 55 years and older, and it’s all deductible on your 2018 tax return. Contact me to see if this strategy will work for you.
Beware of common mistakes
It seems obvious, but common blunders include social security numbers with mixed-up digits, missing signatures, and bad bank account numbers. These mistakes could cost you, literally, so double and triple check your personal information.
To itemize or not to itemize?
Due to the Tax Cuts and Jobs Act, which nearly doubled the standard deduction, itemizing deductions is now obsolete for millions of taxpayers. Unless your financial situation has changed drastically, if you didn’t itemize in the past, you won’t need to do it now. The standard deduction for 2018 is $24,000, so unless your itemizable deductions top that number, itemizing isn’t worth it.
Contribute to your HSA
HSA funds can essentially act as an addendum to your retirement savings because funds can be invested and carried over year after year.
Can’t pay? File anyway
If you owe the IRS money, your unpaid balance will result in a penalty of 0.5% of the unpaid balance per month or partial month. However, failure to file will cost you a lot more: a monthly penalty of 5% of the amount owed. So even if you can’t pay, file your return or request an extension. Read on to find out what to do when you can’t pay the full balance.
Set up an installment plan
The IRS might not have the best reputation, but the agency will work with taxpayers who show that they’re trying to pay their taxes. An installment plan allows you to make monthly payments up to 72 months until the balance is paid in full. This requires a setup fee, but it’s less if you arrange for direct debit from your bank account, and interest on your unpaid balance will still apply.
Request more time if necessary
You can file for an extension before April 15 with Form 4868 for automatic approval, which will give you until October 15 to file your tax return. Keep in mind this extension is just for filing and doesn’t include an extension for payment on taxes owed. If you don’t pay by April 15, your bill will be subject to interest and penalties. However, you can request a 120-day grace period from the IRS to come up with the payment, but you’ll still owe interest and other fees on the balance until it’s paid off.
As the values of homes around the country continue to rise, as well as the cost of rent, home ownership looks more and more appealing. In the past, homeowners have been able to deduct certain expenses on their tax returns. Yet, with the Tax Cuts and Jobs Act of 2017 (TCJA), homeowners may no longer qualify for the deductions that were once beneficial in homeownership. Did you know that TCJA is the biggest tax overhaul seen in the USA in 30 years? If you’re curious about how this might affect homeowners, here are highlights of the federal tax deductions for homeownership under the TCJA.
Even with an increase in the standard deduction this year, many homeowners will continue to see some tax relief. While there will be a decrease in available itemized deductions, a few items that have been deductible in the past may still benefit taxpayers this year and beyond. Deductions such as home mortgage interest, state and local property taxes, and amounts paid at closing continue to be likely deductions while filing in 2019. We recommend you consult with one of our tax professionals to ensure that you are maximizing your tax savings as a homeowner. You can also consult the IRS Publication 5307 here.
- Mortgage Interest Deduction – According to the TCJA, taxpayers can deduct mortgage interest paid on acquisition indebtedness up to $750,000. This deduction can also apply to a second property, so long as the indebtedness does not go above the $750,000. Home equity indebtedness is still deductible as long as the proceeds are used to buy, build, or improve the taxpayer’s home that secures the loan.
- Mortgage Insurance Deduction – When a homeowner chooses not to or is not able to put down 20% or more in a downpayment, primary mortgage insurance (PMI) is required to protect lenders. As of now, certain amounts paid until the end of 2017 remain deductible. Congress is still deciding whether this deduction will be permanently eliminated.
- State and Local Taxes – Taxpayers are now limited to a $10,000 itemized deduction for combined state and local taxes. Homeowners in states with high property and income taxes will face the most impact with this deduction limitation.
- Amounts Paid at Closing – Origination fees, loan discounts, or prepaid interest are not usually deductible in the year that they are paid, but instead over the life of a home loan. However, they may be currently deductible if the loan is used to purchase or improve the home and if that home also serves as collateral for the loan.
Despite the new tax changes under the TCJA, it’s unlikely to be the deciding financial factor for those who have already bought a home or are considering homeownership in the future. Some buyers may consider homeownership less attractive, which could result in lower home values and lower markets over time. According to Nolo, it is estimated that the tax benefits of owning a home will be less than in years past, putting many homeowners in the same place as renters. At this time, there is no clear-cut solution that results in the best solution for homeowners, but with the right financial planning from our CPAs, homeowners can find the best ways to maximize their tax savings and cash flow.
Many workers dream of retiring early. Not everyone has a choice in the matter, but if you do, there are some disadvantages and challenges to be aware of. Even if you can afford to retire early, you might not want to.
Here are some disadvantages to be aware of when it comes to early retirement.
Savings in a traditional IRA or 401(K) can’t be withdrawn without penalty before age 59 ½, so in order to retire earlier, you’ll need to have enough savings in a traditional bank or brokerage account to cover your costs until then. As for social security benefits, you’re allowed to start claiming benefits at 62, but that’s before full retirement age, so claiming early could result in a permanent reduction in benefits (i.e. if your full retirement age is 66 and you claim benefits at 62, you’ll reduce your payments by 25%).
Medicare eligibility doesn’t kick in until age 65, so retiring earlier than that means having to absorb the cost of health insurance independently. If you retire with just a few months to go before Medicare kicks in, you have the option of obtaining short-term coverage, which helps pay for catastrophic medical events but doesn’t typically cover preventive care or pre-existing conditions. If you’re looking at a longer stretch between retirement and Medicare eligibility, you’ll need to shop around for major medical insurance. These plans are the most comprehensive for early retirees and cover a broad range of medical care, from doctor visits to major surgery.
Early retirees can have a difficult time adjusting to an unstructured schedule. With high levels of energy and drive, and a strong desire to still be productive, they risk sinking into boredom and depression as they progress deeper into retirement. Increased anxiety, dementia, and cardiovascular disease have all been linked to health risks of early retirement as well. For this reason, it’s a good idea to keep an open mind about returning to work should you start to feel that early retirement wasn’t as fulfilling as you’d hoped.
Though there are some things to think about before retiring early, with careful planning and goal setting, you can make it work. It’s best to begin saving consistently (and early) – in a Roth IRA or traditional 401(K), but also in a nontraditional retirement plan so that you can have access to those funds before age 58 ½. Financial planners advise to save 30% of your income, as opposed to the conventional target of 10% or 15%. And transfer all tax refunds and bonuses into your nest egg as well. In short, cutting out your daily coffee house latte isn’t going to get you to early retirement.
The end of 2018 is quickly approaching, but there are a few key money moves you should make before the new year, especially in light of the Tax Cuts and Jobs Act. The higher standard deduction means more Americans will ditch itemizing their 2018 federal tax returns.
That means you should probably focus on year-end tax strategies that first lower taxable income, rather than maximize tax deductions. Here are a few key items to tackle before the ball drops on the new year.
Take Stock of Losses
If you follow the stock market, you know that the last few months have been volatile, so there’s a good chance that some of your investments have become losses. That might sound bad, but any losses that are in a taxable account, such as an investment account, bank account, or money market mutual fund, can be sold to offset other taxable investment gains in the same year. Furthermore, if your losses exceed your gains, you can apply up to $3,000 to offset ordinary taxable income from this year.
Max Out Retirement Savings
As close as possible, that is. The more money you put into your 401(k), the more financial security you’ll have in the long run, but a lot of these contributions also reduce your taxable income. At this point you probably only have one or two more paychecks from which to have funds withheld, but even a few hundred dollars more can provide some near-term tax relief as well as bolster your retirement savings.
Fund Your HSA
You have until the 2018 tax-filing deadline to fully fund your health saving account (HSA) in order to get a bigger deduction. The maximum limits are:
- Individuals: $3,450
- Families: $6,900
- 55 or older: an additional $1,000 catch-up contribution
These accounts can roll over indefinitely, so they’re a smart way to save for future medical expenses. HSAs also have a triple tax benefit: contributions are tax-deductible (even if you don’t itemize), earned interest is tax-free, and withdrawals are tax-free as long as they’re used to pay for qualified medical expenses.
Use Up Your FSA
The funds in a flexible spending account typically don’t roll over to the next calendar year. However, some employers allow $500 to carry over into the new year or grant employees until March to spend FSA funds. Even so, now is a good time to use the pretax dollars for doctor appointments, flu shots, and even some “everyday” drugstore items, such as non-prescription reading glasses, contact lenses and solutions, and reading glasses.
If you’re wondering whether you should itemize your 2018 tax returns or take the standard deduction, here are a few last things to keep in mind:
- Medical treatment: If you spend more than 7.5 percent of your adjusted gross income this year on medical expenses, you can deduct those costs.
- Property taxes: If you paid less than the $10,000 limit for state and local taxes, your state may allow you to prepay 2019 property taxes. This way you’ll get the most from the state and local taxes deduction.
- Mortgage Interest: Provided you’re not near the cap on the mortgage interest deduction, which is $750,000 after the new tax law, you can make your January mortgage payment in December to boost the amount of interest you paid during the 2018 tax year.
- Charitable donations: If you routinely give to charities, double up on contributions and make your 2019 donation before year’s end. If you put the double donation into a donor advised fund, which is like a charitable investment account, you’re eligible to take an immediate tax deduction. That means you can take the deduction for 2018 while your funds are invested for tax-free growth, allowing you to make distributions to charity next year or beyond.