Here at MoneyKey, we’re willing to bet the rate of hand wringing, nail biting, and aimless pacing skyrocketed on Monday, April 15.Why is that, you ask? Well, for most taxpayers, it’s the official filing deadline for 2018 tax returns. It’s also the day you could be in for a nasty surprise.If you do end up owing Uncle Sam, you may have the Tax Cuts and Jobs Act to thank for your notice. It made significant changes to the kinds of deductions taxpayers can make, putting sharp limits on itemized deductions and personal exemptions.Although most taxpayers are expected to get a refund, the IRS warns the number of people who owe tax will likely increase this year — even if you normally receive a refund.If you didn’t get that memo, then you may be unprepared for an unexpected tax bill this spring. The realization you can’t pay what you owe can leave you feeling queasy, but don’t worry — there are ways to cover the bill without contacting a payday loans direct lender, even if it’s more than what you have in the bank.
Review your returnIf the IRS tells someone to jump, and most people will ask how high. Those three letters have the power to make anyone jumpy, regardless of how much money they owe.You’ll do whatever it takes to pay off your taxes as soon as possible, if only so you don’t have to worry about the IRS breathing down your neck. But in the hurry to clear your debts, you may be too overwhelmed to notice there are issues with your tax return.If you prepared your taxes without the help of a professional, you may have miscalculated, overlooked a tax credit, or forgot to include a deduction that could greatly reduce your tax debt.Or, like 80 percent of Americans, you may not have adjusted the tax withholdings on your W-4 following the Tax Cuts and Jobs Act as the IRS suggested. If you didn’t catch these errors before the April 15 deadline, be sure to go online to complete Form 4868. This tax-filing extension gives you a maximum of six additional months to file your corrected return. Depending on your reason for filing the form, the extension permitted could be significantly shorter. Without this form, you may face a five percent penalty for every month your return is late, with the maximum penalty being 25%.If you’re wondering, “Do I need to file an extension if I don’t owe taxes?” then you’re in luck. There’s no need to ask for an extension if you know you’ll get a refund. The IRS isn’t concerned with overdue profiles when they owe the taxpayer!
Ask for an abatementA lot of people stress over their income tax returns because there are so many ways it can go wrong. Knowing you may incite the bureaucratic wrath of the federal government can be intimidating. The IRS has more than 100 penalties it can apply to incorrect or overdue taxes!Although you want to ensure you complete your return accurately and on time, people make mistakes. You can underestimate your tax withholdings or completely forget about April’s deadline.Sometimes, you can get away with not filing your taxes. Do you have to file taxes if you don’t owe? The answer is no if you know you’ll get a refund if you file because there’s no penalty for missing the filing deadline as long as you don’t owe the IRS taxes. However, if you owe taxes, you will face a penalty for your late filing.If you’re stuck paying additional penalties on top of your taxes, you may be eligible for an abatement. The IRS grants an abatement, or relief from these penalties, in certain situations if you can prove:
- Extenuating circumstances: If you suffered a death, serious injury, or natural disaster, the IRS may waive penalties for late returns. Check with the IRS to see if your situation falls under what it calls reasonable cause.
- It’s your first offence: Just as your credit history plays a part in finding a personal loan, your tax record can go a long way to helping you receive an abatement. The IRS grants first-time abatements to people with clean tax records free of penalties. Refer to this guide for more information on first-time abatements, and get the 411 on credit scores to learn how your credit history impacts your loan options.
Payment plansPaying for your taxes all at once is ideal, but it’s not the only way to cover your bill. Like many purchases in life, there are alternative payment options available.Your favorite sporting goods store has a layaway program that lets you pay for your daughter’s new bike in several payments.Here at MoneyKey, we expect our borrowers to repay installment loans in multiple chunks — although there’s no penalty if you can pay it off in one lump sum.The IRS has its own version of accommodations for people who can’t pay all at once. It has payment plans that let you break up the full cost of your tax debt over an extended timeframe.There are generally two types of payment options available:
- Short-term payment plans: This extends your deadline for a maximum of 120 days. If approved, you can pay back your taxes via direct deposit, check, and debit or credit cards. There’s no fee for this payment plan, but you will accrue interest and penalties until you pay off your taxes completely.
- Long-term payment plans: If you need more than 120 days to pay in full, there are installment plans that give you up to 72 months to pay off your tax balance. The Direct Debit Installment Agreement (DDIA) withdraws payments directly from your bank account. A non-Direct Debit Installment Agreement, on the other hand, allows you to use another payment option. The fees for these two options differ, although both will accrue interest and penalties until you pay off your taxes in full.
Apply for an Offer in Compromise (OIC)Let’s say you know that even with a generous extension, you won’t be able to pay your taxes. Don’t freak out just yet. You may be eligible for an Offer in Compromise (OIC). This is an agreement with the IRS to allow you to pay less than what you owe.Generally, there are two payment options involved with an OIC. In either case, the amount you pay will depend on your offer or the new amount that you suggest.
- Lump sum offers: You’ll have to pay 20 percent of your offer when you submit your application. After the IRS accepts your offer, you have no more than five months to pay what remains of your offer amount.
- Periodic payment offers: You’ll have to make your first payment when you submit your offer, but you’ll have up to 24 months to pay the rest of it.
Request Currently Not Collectible (CNC) statusIf none of the other options fit your situation, take a deep breath. The IRS won’t slap handcuffs around your wrists and take you away for tax evasion simply because you can’t afford to pay. The IRS mostly focuses its efforts on taxpayers who knowingly understate what they owe. People like you, who file their taxes but can’t pay, aren’t their first priority.There’s still another opportunity to account for your taxes, even if you have no means to pay them. If you can prove that you would experience significant financial hardship by paying your tax balance and your living expenses simultaneously, the IRS may grant you Currently Not Collectible (CNC) status.In short, the IRS will halt any collections activity on your account until you have more income, i.e. enough funds to pay both your essential living expenses and your tax liability.Note that this status won’t forgive your tax balance. It simply defers your payment to a time when you’re in a better financial situation and can afford to pay. A CNC places a momentary pause on your tax bill collection and releases any levies on your wages until your finances turn around.Although the IRS will suspend collections, you will continue to accrue interest and penalties on what you owe. The IRS may file a Notice of Federal Tax Lien, which is a legal claim on any property or other assets in case you fail to pay your balance in the future. They may also take any future tax refunds you earn to pay down your balance unless you can prove you need them to pay for basic living expenses.
Choose your payment option wiselyThere’s a lot to consider here. Although you’ll be rightfully anxious to get it over with, we recommend you think over your options carefully before you make your decision.When in doubt, speak with a tax advisor for help. A professional will be able to answer any of your questions while recommending the best course of action for your unique situation.
Make sure you avoid another tax-surprise next yearNobody likes a surprise bill — especially not when it’s delivered by the IRS at a time when you’re expecting a refund! After the scramble of submitting forms, paying installments, and covering additional interest, one thing is clear: you don’t want a repeat of this to happen again next year.You may be able to avoid a big tax bill next time by trying these five simple tips to bring down the cost of your return.
1. Review your W-4 formsThe W-4 form is an important tax document that determines how much tax gets withheld from your paycheck. It’s something you submit at the start of every new job, but it’s not a one-and-done thing. You should make regular revisions to your W-4 to ensure you’re withholding the correct amount — even if you’ve had the same job for years.The IRS encourages taxpayers to review these forms this year to make sure you’re withholding the right amount under the new tax reform. But some tax advisors suggest revisiting your W-4 every year to make sure you’re on track.
2. Build your tax payments into your budgetThey say there’s nothing in life as certain as death and taxes for a reason. It’s because it’s true. Tax season arrives like clockwork, delivering Tax Day on April 15 every year with few exceptions. It’s as predictable as the Fourth of July or the winter holidays.Compared to an unexpected fender bender, an anticipated expense like taxes is pleasantly simple. You’ll always know the date you’ll owe money. And with online tax calculators, you can estimate how much will be due by this date, too. If you compare this figure to your previous tax return, you’ll have a pretty good idea of how much you’ll owe before you file.Once you have this number, you can factor this into your budget. Make it your goal to save that amount by next year’s tax season.If it’s a large sum of money, divide it by 12 to see what your additional monthly savings would have to be to meet your target. You’ll find it easier to reach these monthly savings goals if you keep expenses down – like your grocery bill – and save in other areas of your budget.
3. Make estimated tax payments every quarterWhen most people get paid, they receive a paystub that shows the appropriate tax withholdings as well as any employer deductions. People who are self-employed or earn income from alimony, dividends, and prizes have to withhold their own taxes and pay them through estimated tax payments.If you don’t receive a traditional paycheck, make sure you calculate your tax payments accurately. If you underestimate, you may have to pay a penalty on top of paying out the difference. You should also make a point of paying these estimates on time every quarter to avoid any late penalties.
4. Know your tax bracketThe IRS calculates your tax rate according to your income. It determines your tax rate by categorizing your income into a tax bracket, which represents the highest tax rate possible for your income and status.In 2019, there are seven possible tax brackets, ranging from a 10 to 37 percent tax rate. Check here to see a complete breakdown. Knowing where you fall can help you estimate how much tax you’ll owe.If you’re wondering, “how much can I make before I owe taxes?” the answer is simple: anything over $0 places you in the first tax bracket of 10 percent. Things get a little more complicated once you start moving through brackets.The U.S. uses progressive tax brackets. This means once you reach a higher tax bracket, not all of your income will be taxed at that new rate. Instead, you’ll be charged the new rate only for the portion of income that pushes you out of the lower bracket.So, for example, let’s say you made $30,000 last year as an unmarried individual. This would put you in the second tax bracket of 12 percent. However, you’ll be taxed 10 percent on the first $9,700, and 12 percent for the next $20,300.
5. Take your taxes to an accountantIf you’re a single individual filing a W-2, then your taxes are pretty straightforward. You can probably complete them on your own without much trouble. It’s even easier if you use reliable tax software that guides you through the process step by step.But if your taxes are complicated, it may pay off to have a professional complete your return. Even though they will charge you for their services, they may catch costly mistakes or enrol you for credits that you would have overlooked on your own.
6. Visit the Taxpayer Advocate ServiceThe Taxpayer Advocate Service is a helpful organization within the IRS protecting your rights as a taxpayer. They call themselves your voice at the IRS, encouraging systemic changes to IRS procedures and providing individual help to confused taxpayers.Their website is an excellent resource whenever you’re unsure about your taxes or you want to learn more about the payment options listed above. You can find straight forward answers to questions like:
- If I Owe Back Taxes Will It Delay My Refund?
- Can You Get a Passport If You Owe Taxes?
- How Long does it take to receive the funds from a Tax Refund?