Make Sure Your Withholding Is Correct This Year . . . The Ins And Outs Of The W-4

Most of you probably already know that getting a large tax refund is not actually a good thing. If you don’t know why, check this out. However, I am pretty sure everyone knows that owing a huge amount of money on April 15th at the tax deadline is a miserable feeling as well. For many people, a huge tax liability at the end of the year can mean that they don’t have enough cash on hand to pay their tax bill in full. Click here to see what to do if that applies to you. The best thing you can do if you are self-employed is to make your estimated tax payments throughout the year based on the amount of income you expect to have. You can consult a CPA for these estimates or you can calculate your tax liability based on tax brackets and form for the current year. However, if you are not self-employed, the best way to make sure you have the right amount of tax withheld is to adjust your W-4.

Many people don’t know what this form is exactly; they just know they fill it out when they start their job and then probably never see it again. Your W-4 is not to be confused with your W-2. Your W-4 is the form your employer gives you at the beginning of each year to determine how much federal withholding you want taken out of your paycheck each pay period. On this form, you enter a number representing how many people you will be claiming on your tax return. If you put a “0” you will have a very high withholding. If you are not married and you have no children, you can generally enter a “1” for one exemption. This will usually get you to the withholding closest to your tax liability. If you are married and have children, your spouse and you should fill out your W-4s together. You need to know how many exemptions each person is claiming so you do not double up and have too much withholding. For instance, there is a line on your W-4 where you can enter a “1” to claim your spouse as well as yourself. However, If your spouse claims his or her own exemption on the W-4, then your withholding will be incorrect when it comes time to file your tax return. I would advise that each spouse claim themselves only and not each other. If you have children, you should discuss which person should claim that child on the W-4 for the year so your combined withholding is accurate.

If you normally itemize your deductions on your tax return, or you are buying a house a during the year and taking out a mortgage which may cause you to itemize if you didn’t used to, then you can use page 2 of the W-4. Page 2 allows you to enter your projected itemized deductions which may also alter your withholding that you should have taken out of your paycheck. Page 2 also offers a worksheet that you can use to determine your withholding if you and your spouse both have jobs, or if you work multiple jobs.

In case you didn’t know, you can also change your withholding any time throughout the year by filling out a new W-4. If you get married (which will change your filing status and combined income), or you have a baby (which will change your exemptions) you may want to change your withholding to account for the change in your tax liability at the end of the year due to these events. You can simply print out a W-4 online and submit it to your employer, or you can request a new form from your employer. Once you submit it, you new withholding amount should be applied to your next pay period.

You can also use the IRS W-4 calculator to decide whether the number of exemptions you currently claim on your W-4 will produce too high or too low of a withholding. You can use this calculator throughout the year to check your withholding and alter your W-4 accordingly.

It is key to keep updating your W-4 throughout the year to coincide with major life events. This way you can give less of your money to the government, interest free, and not have such a large tax due come April 15th. Keep this in mind when filling out your W-4, and leave your questions below!


Thinking About Adoption This Year? Be Sure To Get Your Tax Credits!

Adoption is a great option for people who want to have children. However, the process to adopt a child can be extremely expensive which often deters people from taking on the process. If you want to adopt a child from a foreign country, the cost can be even higher. Luckily, there are tax credits you can take for expenses paid for certain adoption expenses!

The whole process of taking adoption credits can seem pretty tricky so I’ll try to break it down into simple steps. When you file a tax return in a given year, you file Form 8839 to claim the adoption credit. Taking the credit varies if your adoption was domestic or foreign. The adoption credit limit for 2015 is $13,400. In order to receive the credit on your tax return, you must have documented qualified adoption expenses for an eligible child. An eligible child is person under the age of 18 or is not physically or mentally capable of taking care of himself. Qualified adoption expenses include any court fees, adoption fees, attorney fees, travel expenses, etc. that are related to the adoption of the child. You cannot deduct expenses incurred for adopting the child of your spouse or for surrogate parenting. Additionally, you cannot deduct expenses for an adoption that were reimbursed by your employer. Now, once you have your list of expenses for your adoption, when do you can take the credit for them?

When you incur expenses for a domestic adoption during the year, and the adoption does not become final during that year, you may be able to receive a credit for those expenses in the following tax year. If the adoption becomes final during the year, you can receive a credit for those expenses in the current year tax return. Odd, right? Here’s an example to simplify it a little. If you spent $5,000 in 2013 for an adoption and it does not become final, you can receive a credit for those expenses on you 2014 tax return. In 2014, you spend $3,000 on the same adoption, and the adoption becomes final that year. You may receive a credit for those expenses on your $2014 tax return. Therefore, your total qualified expenses for your 2014 tax return would be $8,000.

However, taking credit for adoption of foreign children are slightly different. If you incur expenses for a foreign adoption, you cannot deduct those expenses until the year the adoption is final. For instance, if you incur $2,000 in 2012, $3,000 in 2013, and $4,000 in 2014 and the adoption becomes final in 2014, you may receive a credit for all $9,000 of expenses on your 2014 tax return.

Tax Tip: It is extremely important to keep detailed records and receipts of all your adoption expenses since your adoption may span several years. I would recommend creating an excel spreadsheet to keep a detailed record of expenses. You should still keep a file of all receipts for backup.

The credit you can take is subject to AGI limits and phaseouts. For your 2015 tax return, if you make less than $201,010, you can receive a credit for all of your qualified adoption expenses up to the $13,400 limit. Between $201,010 and $241,010 your credit phases out. If you make above $241,010 you will not receive the credit. There is also another limit on the amount of credit you can take for a certain year. If you have qualified adoption expenses for the adoption of the same child of multiple years, the credit you can take is reduced by credit amounts taken in previous years. See the example below for clarification.

Example: Let’s say you took a $4,000 adoption credit on your 2014 tax return. During 2014 you spent $10,000 on qualified adoption expenses which you may receive a credit for on your 2015 tax return. On your 2015 tax return, you take the credit limit of $13,400 and subtract $4,000, the adoption credit taken in the prior year. This comes to $9,400. On your 2015 tax return, AGI limitations permitting, you can take the lesser of the $9,400 or qualified expenses ($10,000 in this case) as your credit. If you took adoption credits for multiple prior years, the same system applies and you would add all of those credits together and subtract them from the current year tax return adoption credit limitation.

If you adopt multiple children, you may be able to take the full credit for each child ($26,800 for two children in 2015). Additionally if you file your tax return as married filing separately in the first year which the credit becomes available, you cannot receive a credit for those expenses. For example, if you incur expenses in 2012 to be credited on your 2013 tax return, but you filed a married filing separate tax return for 2013, you cannot take the credit unless you file an amended return and change your filing status. You can carry forward any unused credit for five years.

Special Needs Child: If you adopt a child that is determined to be special needs, you can receive the maximum credit the year the adoption is final even if you did not pay enough qualified adoption expenses. Special needs are not the same as you would normally think. For a child to be special needs, they must have been a U.S. citizen when the adoption process started, they cannot or should not be returned their parents home, and the child would likely not be adoptable unless assistance is given to the adoptive family.

If adopting a child is the route you are taking, be sure to take into account this credit! If you think you missed an opportunity to take this credit in previous years, you may be able to file an amended return to claim the credit, statute permitting.

Don’t Fall For IRS Impersonator Scams . . . Protect Your Identity This Year

Identity theft has become a massive problem for the federal government during the past few years. This affects your taxes when a criminal files a tax return using your social security number in order to claim a fraudulent tax refund. It should be noted that not every case of identity theft is a tax issue. If someone steals your credit card information, but doesn’t have access to your social security number, then that case would probably not become a tax issue at that time. However, you should take steps to ensure that no other information including your SSN does not become compromised. People can get your information thousands of different ways, but there are some things you can do to avoid identity theft.

If you didn’t know already, the IRS will NEVER contact you via phone or email. I repeat, NEVER. I don’t care if they sound like the most believable person ever. Hang up the phone and ignore them. If the IRS really needs to get a hold of you that badly, they will send you a notice. If someone contacts you via either of those mediums pretending to be an IRS employee, DO NOT give them any of your information. You should immediately send any suspected fraudulent emails to You should also report any scamming phone calls to the IRS at 1-800-366-4484 or you can report a scam online at the IRS Impersonation Scam Reporting.

One obvious red flag that your identity may have been stolen is if you file your tax return and you get a notice saying a return has already been filed for that social security number. If this occurs, you need to report this to the Federal Trade Commission. You should also contact one of the three large credit unions (Equifax, Experian, or TransUnion) to notify them of the fraud. Next you should fill out Form 14039 and return it to the IRS. You should also respond promptly to any notices you may receive from the IRS regarding the fraud. The longer you leave it alone, the more out of hand your situation will become. Lastly, you should always continue to file your tax returns. If you are a victim of fraud, they may require you to paper file your return. Event though this can be a pain, you still need to file it. Remember that interest and penalties can accrue on unpaid tax. While you may be able to get the penalties removed due to the fraud, the IRS does not normally waive interest accrued.

You can also get an Identity Protection PIN number to file with your tax return. This number helps ensure that your social security number will not be stolen or misused. A CP01F notice from the IRS invites you to get an IP PIN number because you could possibly be a victim of fraud. You are not required to get an IP PIN, but if you do, you cannot opt out in future years. The IRS will send you a CP01A notice with a new IP PIN number each year in December. If you have an IP PIN number you will file your return like you normally do, but you will simply include this number on your tax return. If you are required to have an IP PIN number because you previously opted to have one, your return will be rejected if you do not include this number on your tax return.

These are just a few steps and contacts to help you if you are ever caught in a fraud debacle. I won’t lie to you though. Dealing with the IRS when your social security number has been stolen is not a fun or easy task. It will be difficult, but if you nip it in the bud and take action as soon as possible, the process will be much less time-consuming and stressful. Have you ever had a problem with tax fraud? If so leave your comments below with any situations that could add additional information to this discussion!

4 Tips For Making Next Year’s Tax Filing Less Stressful

I know what you’re thinking. “Another post on The Tax Bleep? How could that be? It is after April 15th, and I don’t need to think about taxes for another year!” I get it. No one wants to think about their taxes more than the most minimal amount of time necessary. However, there are a few things you can do throughout the year to make your taxes less stressful and cumbersome when the that time of year rolls around.

1. If you switch jobs and make significantly more or less money than you were making during the previous portion of the year, be sure to take this into account when calculating your withholding. You can use the IRS calculator as one option. Another option is to contact your CPA and ask them what the tax implications of your job switch will be. Lastly, you could input your estimated earnings into the 1040 and calculate your tax manually based on tax tables.

2. If you have a big life event, be sure to adjust your withholding for this change. For instance, if you have a baby, you will be able to deduct medical expenses associated with having the baby. You will also have another exemption on your tax return which is an extra $4,000 for 2015 that you get to deduct from your income. Another life event that may affect your taxes is if you get married! Getting married will usually double the amount of money you make, but will also change your filing status as well as your exemptions. You may also need to adjust your withholding to take this into account.

3. Many people invest in various things. A common investment is in stock. It is extremely important to keep your basis information for any stock purchased. Basis is the amount you originally paid for the stock. When you sell the stock, it is important to have your original basis because the basis reduces the amount of the sales price on which you are taxed. For instance, if you sell stock for $500 in 2015, but you paid $400 for the stock in 2012. This means you will only be taxed on $100 instead of the full $500 sales price. If you purchased stock a long time ago and your broker does not have record of the basis, be sure to take the time to find it through out the year so your tax preparation process can be painless when the time comes. If you don’t have basis when you send your information to your CPA, then they will inevitably call you looking for that number, and your tax return won’t get finished until you have found it or give up looking.

4. If you plan on switching CPAs for the upcoming tax year, it would be very helpful for your new CPA to have your tax returns for the year or two prior. If you can get these documents together, and give them to your CPA, they can be sure to take into account any carryover losses or other information that may be necessary in preparing future tax returns. It is much more efficient to give these to your new CPA so they don’t have to ask and wait for your response.

These are just a few tips that you can do to prepare for next years tax season to make it less stressful. You can also check out various tax checklists online! It could also hopefully help you avoid a slap in the face when you receive your tax return showing that you owe an unexpectedly large amount of tax. Are there any other things you can think of to help you prepare your taxes throughout the year? Leave your comments below!

Here’s What CPAs Do After Tax Season. Yes, We Are Real People Too!

11133817_10206601525579681_5040968260832988179_nSo . . . tax season is over. YAYYYYY!!!! Okay, sorry. It’s been a long, but somehow short 2 and a half months so a mini-celebration is in order. Well, we’ve been going over so many tax issues the past few months that I wanted to lighten it up a little, and let you know what us tax professionals do outside of tax season. Yes, we are real people and we know how to function when we’re not staring into a computer screen and analyzing numbers. So here’s what goes on in case you were curious!

1. Extensions: The first obvious thing we do is get all of the extensions filed. For business returns, we have until September 15th to file. Personal returns must be filed until October 15th. We call the months leading up to those deadlines the “second tax season”. If someone extends a lot of returns, this second tax season could be just as stressful as the first. However, many professionals try to file most or all of their returns by the March or April 15th deadlines. Then they file any extensions throughout the year so their second tax season is virtually nonexistent.

2.. Continuing Education: Many tax professionals are Certified Public Accountants. Like many other professional license holders, CPAs are required to complete continuing education credits in order to remain competent in their profession and to renew their license. Each state has its own requirements for continuing education hours. However, to maintain membership in the AICPA, CPAs are required to complete 120 hours of continuing education over a three-year period.

3. Reviews, Compilations, Audits: Many tax professionals work at CPA firms that operate year round (like me!). This means business doesn’t just stop once tax season is over. CPA firms are often hired to conduct audits, reviews, and compilations. Most often this is done for businesses. Many businesses need these services to comply with boards of which they may be members or to report information to investors. If you think you need one of these services, be sure to contact your local CPA office for information!

4. HAVE FUN! Yes us tax professionals do have fun too! There’s obviously many different versions of fun, but to each their own. I personally CAN’T WAIT to have the time to read a book front to back! I also will get back to the gym at lunch time. Often during tax season, you take 15 minutes or less for lunch or no lunch at all. We eat while we work! I’ll also head up to Lake Tahoe on the weekends to soak up the sun and enjoy the beautiful view. If you’ve never been to Tahoe, you should go sometime. It’s beautiful!

Life doesn’t end when tax season ends, and as a tax professional, I can tell you that we aren’t all about work all the time. Having fun and enjoying my much-needed free time is always at the top of my list! What do you like to do with your free time? Any comments about things I should do during the off-season? Leave your ideas below!

The Future Of Health Care Penalties And How To Avoid Repaying The Premium Tax Credit

As you probably know already, health care has become mandatory for most people in the United States. If you are offered health coverage through an employer or purchase your own plan already, then nothing will change much for you tax wise. You simply mark a box on your tax return that states that you had full coverage the entire year. However, if you did not have health coverage for the entire year, and you do not qualify for any exemptions offered by the government, then you may have to pay a penalty on your tax return.

For 2014, the penalty is the larger of $95 per person and $47.50 per child under 18 up to a maximum penalty of $285 per family OR 1% of your modified AGI. If your modified AGI is below the filing thresholds (this means you do not make enough money to be required to file a tax return) then you don’t have to pay the penalty because you aren’t filing a tax return. The penalties increase in 2015 and continue increasing over the years. For 2015, the penalty is the larger of $325 per person and $162.50 per child under 18 up to $975 OR 2% of your modified AGI. This penalty will come through on Line 61 of Form 1040.

You also may be able to qualify for the Premium Tax Credit if you purchase health care from the Marketplace. The Premium Tax Credit is given to you based on the income you expect to earn during the year which you report to the government when you apply for health insurance. The credit reduces the amount that you must pay out-of-pocket for your monthly premium. It is extremely important to report any change in life events during the year to your health marketplace. These life events include: a significant change in your income during the year, change in your marital status, or an increase in your number of dependents. The reason you need to report these changes throughout the year is because they may affect the amount of the tax credit you receive.

If you do not report the changes and your income increases, you may receive too much of a credit during the year, and you may be required to pay back the excess credits you received on your tax return. For instance, you may qualify to receive a $60 credit at the beginning of the year. However, during the year, you get a new job and your income increases. This may cause the credit to which you are entitled to decrease. If you don’t report this change in income to the marketplace, you will continue to receive a credit that is higher than you are entitled to receive. When it comes time to file your tax return, you will receive Form 1095-A, and it will show your premium amount as well as the credit you received. You will need to file Form 8962 in order to determine the amount of the credit you are entitled to based on your Modified AGI. If you are required to repay a portion of your credit, it will come through on Line 46 of Form 1040.

There are also different ways in which you can claim the Premium Tax Credit if you are eligible. One option is to claim the credit throughout the year in order to reduce your monthly premium payment. Your other option is to forgo the credit during the year, and then claim the credit on your tax return for the year. Either way, you must file a tax return in order to claim the credit.

Be sure to get coverage for 2015 or make sure an exemption applies to you in order to avoid a penalty on your 2015 tax return! The marketplace enrollment date ended February 15, 2015, but you still may be able to enroll in the federal marketplace until April 30, 2015. If you are enrolling in the marketplace through your state, check to see if the dates for enrollment have extended. Click here for your state’s marketplace contact information!

If you are purchasing healthcare through the marketplace, be sure to update your income and other life changes discussed above in order to avoid having to repay your Premium Tax Credit at the end of the year!

Excited About That Tax Refund? Think Again.

61213797It’s refund season, and while getting a tax refund seems exiting because you get a lump sum of cash, getting a refund is not necessarily a good thing. Of course you don’t want to owe a huge amount to the government either, but if you estimate your tax and subsequent withholding or payments correctly throughout the year, it is much more beneficial to owe a tiny amount or receive a tiny refund. Here’s why.

If you get a large refund, the government does not pay you interest on this money. Most people nowadays realize that a refund is simply an interest free loan that you gave to the government. The government charges you interest if you don’t pay your full tax liability by a specified time so it doesn’t make much sense to loan money to them without charging interest. The average return for 2014 so far is around $2,800 to $3,000. That is a good chunk of money that you could have spent on something else.

One obvious option is to save that money. Average savings account interest rates are around .06% which isn’t much but either way it would still be more than you’d be earning on your interest free loan to the government. However, it is possible to find accounts with very good interest rates all the way up to 1%. Banks such as Ally Bank or Synchrony Bank offer very high interest rates compared to the average. Throughout the year you could save you extra money in these accounts to earn interest. Additionally, you could put your money into CD which usually earns higher interest than a savings account. You could also invest in various stocks, municipal bonds, or savings bonds to name a few. All of these options could potentially increase you earnings without lifting a finger. It is kind of like getting free money! However, some options come with certain risks so it is important to determine the type of return you are hoping for with amount of risk you are willing to take.

Saving or investing your money is not the only option. You could also choose to pay of debts with you extra income. The average household credit card debt is approximately $15,000. In 2014, the average credit card interest rate was around 15%. However some credit cards can be in the 20% range. This means your credit card can accrue a huge amount of interest the longer it takes to pay it off. Instead of paying in unnecessary money to the government, you could put the extra money you have throughout the year to paying off your debts.

If you are fortunate enough to not have any debts like the rest of us do, and you feel that you save enough money already (there’s no such thing as too much saving, in my opinion!), you could buy that new outfit or gadget you have been wanting! Instead of waiting until the government decides to give you back your money, you could have your desired item much sooner! Lastly, if you are terrible at saving, and you’ll simply spend your money as soon as you see it, it may just be best to treat your refund as a savings account. This isn’t advisable since there are so many other options to earn a bigger return on your savings, but if you feel this is the best option for you, then go for it!

Leave comments below with any other ideas you may have!

April 15th Is Almost Here . . . Have You Made Your IRA Contribution Yet?

If you have an IRA, you could potentially get a tax deduction for contributing to this account. It is already a good idea to invest in your retirement, but it is even better when you pay less tax due to your investment! You can choose to contribute to a traditional IRA or a Roth IRA, and both have different tax implications.

If you contribute to a Roth or traditional IRA, the limits are the lesser of $5,500 per year ($6,500 if you are age 50 or older) OR your taxable income. Many people have one account or the other. However, if you have both accounts the contributions differ. If you have both accounts, the amount you are allowed to contribute to a Roth IRA stays the same, but is reduced by the amount you contribute to your traditional IRA. For instance, if you contribute $3,000 to your traditional IRA, then you can contribute $2,500 ($3,500 if you are 50 or older) to your Roth IRA. Roth and traditional IRAs are also taxed differently.

If you contribute to a traditional IRA, your contributions may be deductible. You may be able to receive a deduction for the full amount contributed ($5,500 or $6,500) or your deduction may be phased out based on your AGI. If you and your spouse are not covered by an employer retirement plan, your contributions up to the allowed limit are deductible regardless of your AGI. If you are covered by a retirement plan, your deduction allowed is phased out as follows (The numbers in parentheses refer to 2015 tax year AGI limitations):

Filing Status AGI Deduction Allowed
Single or
Head of Household
Below $60,000 ($61,000) Full contribution is deductible
Between $60,000 ($61,000) and $70,000 ($71,000) Deduction is phased out
Above $70,000 ($71,000) Deduction disallowed
Married filing jointly
or qualifying widow
Below $96,000 ($98,000) Full contribution is deductible
Between $96,000 ($98,000) and $116,000 ($118,000) Deduction is phased out
Above $116,000 ($118,000) Deduction disallowed
Married filing Separately Below $10,000 Deduction is phased out
Above $10,000 Deduction disallowed

Even if your deduction is phased out, you can still contribute up to the $5,500 or $6,500 limit. If a portion of your contribution is disallowed, you need to file Form 8606. This designates your contributions as nondeductible. Even if you are not required to file a tax return, you still must file this form with the IRS. By filing this form, it helps the IRS keep track of all contributions you have made to an IRA that haven’t been deducted on your return. When you take a distribution from your IRA, you do not have to claim that distribution in your taxable income up to the amount that you had nondeductible contributions. If you fail to file this Form with the IRS over the years, distributions you take from your traditional IRA will be taxed as ordinary income whether or not you had previous nondeductible contributions. You can also claim a all or a portion of you IRA contribution as nondeductible even if it could be deductible.

Contributions to Roth IRAs are not deductible on your tax return. However, they are generally not taxed when you receive qualified distributions. A distribution is qualified if it was made after a 5 year period that begins with the first taxable year that you contributed to your Roth IRA, and the distribution was taken on or after you turned 59 1/2, the distribution was taken because you were disabled, or because a distribution was made to your beneficiaries after your death. If you meet the 5 year requirement and one of three requirements listed, your distribution will not be taxed.

On the other hand, traditional IRA contributions can be used as a deduction as discussed above. However, when you take a distribution from your IRA, it will be included in income and you will be taxed on it. For both Roth and traditional IRAs, if your distribution is taken before you turn 59 1/2 and you are not disabled or distributing funds to your beneficiaries, then you could be charged a 10% early distribution penalty when you file your tax return that year.

Not only can you be penalized for taking money out of your IRA too soon, but you can also be penalized for putting money into your IRA. If you are 70 1/2 or older, you can no longer put money into your traditional IRA. This does not apply to Roth IRAs; you can contribute to your Roth IRA regardless of age. If you do, you will be penalized 6% per year until you withdraw the amount you contributed and any earnings made on that amount. Additionally, if you put more than the allowed limit ($5,500 or $6,500) into your Roth or traditional IRA, you will be penalized at 6% until you remove that money and earnings made on that amount.

At 70 1/2 you are required to begin taking required minimum distributions from your IRA. This does not apply to Roth IRAs. A required minimum distribution is the minimum amount that you are required to take from your IRA during a certain tax year. This in theory is to make you withdraw most or all of your money before you die so there is not a huge balance sitting in the account. Click here to see the worksheet you can use to figure out if you need to take a required minimum distribution.

Contributions to you IRA can be made for the 2014 tax year until April 15, 2015, and April 15, 2016 for the 2015 tax year. Additionally, if you contributed too much money, you have until April 15th to remove that money and any earnings without being penalized.

Happy retirement saving everyone! Please comment below with any questions!

Here Is What Can Happen If You Don’t Or Can’t Pay Your Taxes

I’m pretty sure we all know that paying your taxes is not really an option. If you don’t pay them, many annoying and bad things could happen, and no one likes dealing with the IRS more than necessary. Some people think the IRS won’t notice if they don’t pay taxes, but let me reassure you that they will find out eventually and you most likely won’t get away with it. However, sometimes paying your taxes may become difficult if you are going through a hardship or got a little in over your head.

When you don’t pay your taxes . . .

taxes102714If you don’t pay your taxes, you will probably receive notice after notice from the IRS until you deal with the issue. Remember that interest and penalties stack up over time so the amount you finally pay will be much higher than if you paid your tax bill on time. Interest on your amount due can compound daily, and penalties are added to your bill on a monthly basis. You may potentially be able to get your penalties waived, but the IRS will not waive interest. If you wait too long to pay your bill, your penalties and interest may end up being higher than your original tax liability!

The time limit for the IRS to collect taxes from you is 10 years. You might think, “Oh good, well I just won’t pay my taxes and then time will run out!”. Bad idea. This can cause many financial hardships for you. One major thing that can happen is the tax debt you owe is reported on your credit report as an outstanding debt which could hurt your credit score the longer it goes unpaid. This could cause you to have problems applying for credit cards, buying cars, buying a home, etc. Additionally, the IRS can put a lien on your personal property, most commonly your home. This means that if you decide to sell your home, the IRS will get paid the amounts they are owed before you see any of the proceeds. Having a lien put on your home could also mean that you cannot sell your home until you pay off the debt, or it could keep you from getting home mortgage loans in the future. The 10 year period is not an end all, be all however.

The period of collection can last longer than 10 years for a variety of reasons. One reason is if you voluntarily approve for the time period to extend beyond 10 years. You may be thinking “why would anyone ever agree to that?” Well, if you apply for an installment agreement or an offer in compromise, you may be required to waive the 10 year limit in order to be approved. Additionally, any time that collection is suspended, the 10 year period extends further out for that amount of time. For instance, if you file for bankruptcy, the IRS often cannot collect from you during that time. This means that the 10 year period will extend for the amount of time of your bankruptcy case, plus 6 months. Also, the time that your installment agreement request or offer in compromise request is being reviewed could also cause your 10 year period to be extended for the amount of time of that review process.

If you file your tax in a future year and are due a refund, that refund could also be taken by the IRS to satisfy a portion of your prior tax liability. Additionally, other payments you receive could be seized by the IRS after you have been properly notified such as your social security payments. At the drastic end of the spectrum, you could go to jail if the IRS determines that you have been purposefully trying to evade paying your taxes.

If you can’t pay your taxes . . .


One option taxpayers have if they can’t pay their balance is full is an installment agreement. In order to qualify for an online installment agreement, you must have filed all required tax returns. Your tax bill must be below $50,000 if you are filing an individual return, and this includes any penalties and interest applied to your return. Businesses must owe $25,000 or less in payroll taxes. If you don’t qualify for an online installment agreement, you can fill out and mail in Form 9465 (Installment Agreement Request) and the Collection Information Statement.

Another option is to apply for an Offer in Compromise. Many places offer these as a solution in advertisements to help you clear your IRS debt. However, the IRS does not simply hand out Offers in Compromise. The qualifications are very specific. There are three instances in which the IRS accepts an Offer in Compromise request. The first is if you and the IRS have a legitimate dispute regarding the amount of tax due. Obviously most people think they pay too much in taxes, but in order to qualify for this reason, the dispute must be genuine. Another reason you can apply for an Offer in Compromise is if there is serious doubt about whether or not the tax liability is collectible. This happens when your assets and income are drastically lower than the tax owed, and you must be able to prove this. The last reason is if the tax owed is correct and could be paid, but forcing the person to pay it would be unfair and create an economic hardship. This is only for very special circumstances. To make sure you qualify, you can fill out the Offer in Compromise survey. You must pay a $186 fee when you apply for an Offer in Compromise unless there is doubt regarding the tax owed (the first option discussed) or if your monthly income is lower than 250% of the poverty guidelines. This fee is nonrefundable.

Under the Offer in Compromise, there are two payment options. You can pay in a lump sum which means you pay in five or fewer installments over five or fewer months. If you choose this option, 20% of the tax liability is due with the application and is not refunded to you even if you are denied. It is simply applied to your tax due. The other option is a periodic payment offer which is due in six or more monthly installments within a 24 month period. With this plan, you must pay the firs installment with your application, and it is also nonrefundable.

Obviously the best option would be to plan correctly throughout the year and have enough saved to cover your tax bill. You can continuously check your potential tax due based on income throughout the year to that date using calculators on the IRS website. It may not be 100% accurate, but it will give you an idea of what you will owe. April 15th is quickly approaching so be sure to get your taxes done on time, or file and extension if you haven’t already!

Image Source (1), Image Source (2)

Do You Need To File An Extension For Your Tax Return? This Is What To Do!

As you probably know, individual tax returns are due by April 15th, 2015 for the 2014 tax year. However, for various reasons you may not always be able to file your tax return by that due date. You should not miss the date and file when you can because you will incur penalties and interest, even if you will get a refund once you file. If you won’t be able to file your return by April 15, you can file an extension which will extend the due date of your return 6 months to October 15th. There are some exceptions to this which we’ll discuss below.

Form 4868 is the form you file to request an extension. This form needs to be submitted no later than April 15th. When you file this form, you need to know your estimated tax liability for the year based on the information you currently have. Then you enter the amount you have already paid either through withholdings or estimated payments. If there is a balance remaining, this is the amount you should send in with your extension. Filing an extension does not mean you don’t pay your balance by April 15. You can still be charged interest and penalties if you do not pay your estimated balance due by April 15. You do not need to include a reason for why you need the extension. When you submit your tax return (by October 15), do not attach Form 4868 to your return because the IRS will already have record of it as long as you submitted it correctly. The IRS will only contact you if your request for extension is denied. If you don’t hear anything from the IRS after you file your extension, then that is completely normal so don’t worry.

If you are a U.S. citizen that is outside of the country when your tax return is due, you automatically are allowed two extra months to file your return (June 15) without filing an extension. To be considered outside the country, you must live outside of the United States (and Puerto Rico) and you main place of work must be outside of the country, or you are in the military stationed outside of the United States. Even if you are physically present in the U.S. at the time the return is due, you are still considered out of the country if either of those situations apply to you. If you will need more than the extra two months, you can mark a box on Form 4868 to request an additional four months to file.

There are multiple ways to make this payment. You can pay online using Direct Pay, the Electronic Federal Tax Payment System, or a debit or credit card, and you can also pay over the phone. You can also send a check. Be sure you send it to the correct filing address based on where you live to avoid complications.

If you don’t think you’ll be able to file your refund on time, be sure to file that extension! You’ll be happy you did when you don’t get an additional bill for penalties and interest!