Tax Issues

Beating Tax Debt: Part 3- Prevention

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If you’re battling tax debt, make sure you read Part 1 and Part 2 of this series first. However, if you do not have any tax debt, or, you just want to prevent owing in future years, read on.

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To say that an ounce of prevention is worth a pound of cure is a gross understatement when it comes to taxes and avoiding a tax bill.

You CAN automate your preventive steps and reduce your tax stress! It’s a lot easier than you thought, and I’ll provide you with some basic tips in this post on how you can do this.

Several small adjustments can prevent you from having tax bills.

Here are a few ideas for avoiding a tax bill:

Learn which deduction category is best for you. There are two types of deductions: standard and itemized. Standard deductions are the amounts set by Congress, which determines the income that is excluded from the tax calculation. Itemized deductions are an alternative that allows a person to use other expenses to calculate the deduction amount. If you pay mortgage interest, have a lot of medical expenses, contribute generously to charity, or have a home office that you use for your job, then itemizing your deductions may be more advantageous than taking the standard deduction rate. IRS has a list of all of the things that can be included as itemized deductions. Check this list to see which deduction category is best for you.

Go back to school. There are tax credits and/or income reductions available to folks that pay for college. Normally, you can get a student loan for the expenses, but it’s better to pay as much as you can out of pocket (that way, you don’t create a new bill). If you want more information about education tax benefits, IRS’s website features an entire section that explore all of the benefits of obtaining an education. Aside from the tax benefit, getting an education could open the door to better job opportunities and more income to be taxed– uhm, I mean, more money to accomplish your goals.

Open a small business. Small businesses can generate income, but, during lean years, can reduce taxable income. The tax benefits of opening a business include being able to write off business related travel, tools, equipment, qualified training, and even the cost of licensure. The point is to always retain a business purpose: you must remain within IRS’s guidelines. IRS has a whole section on small business, as well. If you decide to cheat a little on your taxes, you may find yourself as the recipient of a very unpleasant audit (as former auditor, I can tell you that you DO NOT want this experience)!

Change your W-4. This was briefly mentioned in Part 2 (under planning refunds for subsequent years via increased tax withholdings). Withholdings generally work in the following way: you do the W-4 worksheet and it will come up with a number between zero (0) and ten (10). After that, you put the number on your W-4 form, turn it in to your employer, and that determines how your withholding is calculated. However, if you really want to prevent from having a huge tax bill, you will either reduce that number (if you calculate 5 on the worksheet, put 3 on the form that you submit to your employer) or indicate that you want additional money held out of each check. You are not legally required to use the number calculated on the worksheet, but you are required to reasonably estimate your tax (don’t put down “10” on the form when your worksheet calculated “2”). This is a less drastic way to prevent tax liability, since this involves smaller payments toward the tax.

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That concludes the Beating Tax Debt series! I hope you al have enjoyed the information as much as I’ve enjoyed putting this together for you. If you have tax questions or comments, please feel free to comment below. Also, if you don’t already, be sure to follow me on Facebook, Twitter, and Instagram. I’ll talk to you all soon!

Beating Tax Debt: Part 2- Treatment

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After figuring out what is causing your tax debt, the next step is to immediately control the issue. There are several ways to handle tax debt so that it is manageable and less stressful on you.

A multi-prong payment strategy will get your tax debt under control quickly and easily.

Before you can resolve the debt, you will want to explore direct and indirect payment options. There are three ways to pay a tax debt directly, and you can weigh which one works best for your situation. Further, there are ways to indirectly pay your tax debt AFTER you’ve gotten a bill.

First, if you have the money, you can send a check for the full tax balance at the time that the tax return is due. Even if you plan on sending your tax return after the due date, you will still want to submit your payment on the due date, which is normally April 15th. If you pay after the return’s due date, you’ll owe penalties and interest, calculated on a daily basis. If you tend to owe every year, and if your balance is over $1000, you may find that you are assessed an underpayment penalty of 10%, even if you pay off your taxes by the return due date.

If you can’t pay the full amount on April 15th, but anticipate you can have the money within 30, 60, 90 or 120 days, then you can request an extension of time to pay (NOT to be confused with an extension of time to file, which allows you to file up to 6 months after the return due date). The extension of time to pay won’t prevent penalties and interest, but at least you will establish with IRS that you intend to pay the balance in full. You will have to call IRS directly in order to

The third option is an installment agreement. These allow you to pay your balance off over a 72 month period, but there is a charge with requesting them (currently $120). Also, if you are late with your payments or end up owing on a future tax year while you’re under the plan, your plan will be cancelled and you will have to pay a reinstatement fee. This works well for those balances that are too large to pay at once. You can fully pay the balance at any time, and you won’t be penalized for paying more than the required amount or for doing a full payoff.

If you’d like IRS’s explanation of payment options, CLICK HERE.

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There are a few interesting indirect ways of paying your taxes. These are great because they are usually easy to deploy and won’t put serious cramps in your lifestyle.

One of the least utilized methods for reducing a tax bill is a penalty waiver request. Once upon a time, IRS used to be able to quickly determine your eligibility for waiver when you called them. I’m unsure if they still have this function, but it’s always good to ask. If you are denied your waiver, you can always write to request it. (I have an EASY waiver request template available here!) Allow 30 days for a response, as IRS is required to respond to all written requests within a 30-day period. Pretty much everyone, except the worst tax offenders, probably qualifies for some sort of reasonable cause waiver.

When the penalties are waived, you can expect your balance to decrease. Depending on the type of penalty, you may see as much as 25% vanish from your bill, not to mention the fact that the interest will decrease, since it is calculated on the tax due and the penalties.

Another way to indirectly pay your taxes is to plan for a refund in the subsequent year. So long as you’re under a payment plan, you will be chipping away at the balance, but the quickest way to see a big drop in your tax bill is to have refunds applied from subsequent years. You can increase the likelihood of generating a refund by stopping whatever caused the bill, increasing tax withholdings, increase pre-tax retirement contributions, and by READING about the different tax credits available. Credits can be the difference between paying on a tax bill for 6 years or wiping it out in two or three years.

THIS is why it’s important to file every year, even when you are only getting a small refund. Even tiny refunds can be applied to reduce an existing bill.

If you need to play catch-up and file some older tax returns, feel free to contact me for assistance, or visit your local IRS so that you can get the forms and publications needed to prepare those old returns!

Stay tuned for the third and final part of this series, that addresses how you can prevent owing tax.

Beating Tax Debt: Part 1- Diagnosis

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One of the more interesting things that I’ve encountered when I worked at Internal Revenue Service is the confusion surrounding tax debt. For many people that owe taxes, they find it difficult to get out of tax debt and stay out of it. They don’t quite understand how they got into the debt and what they can do to prevent it in the future. No matter how big or small the bill, the steps for resolving the issue remains the same.

In order to STOP owing IRS, you must understand WHY you owe and you must STOP doing whatever is causing you to owe.

Of course, many people are so intimidated by IRS that they won’t even call IRS to get some help with their tax dilemma. Even worse, many paid tax preparers are not very good at understanding and explaining what generates a tax bill. Sorry to say it, but many paid tax preparers only input numbers, without having much knowledge of tax law and its implications. I’m here to tell you: if you aren’t clear on why you owe, you WILL owe again. So, Step 1 of eliminating tax debt is to properly diagnose what caused the tax bill.

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The easiest way to figure out what happened with your taxes is to order your return and account transcripts online (these are FREE of charge and available immediately after signing up on IRS’s website; unfortunately, at the time of this post, the online order system is unavailable, though the transcripts can be mailed to you). Then you can compare the numbers on your copy of the tax return to what’s on the transcript. If you don’t have enough prepayments (either tax withholding, quarterly estimated tax payments, or tax credits) to cover your tax, then you will have a bill. If you find yourself owing for one year, after never owing in previous years, you may want to check the transcripts against one another, to see where the difference occurs.

If you look at your transcripts and are still confused, you can visit your local walk-in IRS so that one of the employees can walk you through your transcripts. If that is more time consuming than you would like, feel free to contact me, and I can assist you. After working at IRS for nearly a decade, I’m confident that I can resolve your issue.

However, I’m sure that with a little patience, anyone can figure out what happened with their taxes to cause a tax bill. This is a crucial step in knocking out tax debt. Stay tuned for Part 2 of the “Beating Tax Debt” series, so you can find out the next step needed to handle your tax debt permanently!