Taxes

When you file your individual income tax return, do you usually owe taxes?  If you do, then this is an indication that you are either not having the proper withholdings from your paycheck OR if you do not receive a W-2 for income, then you should be making estimated payments.

What is the consequence if you are owing more than $1,000 in taxes when filing your return?  How does penalties and interest of an additional 50 percent of taxes sound to your budget? Penalties and interest could each amount to 25 percent of the tax owed – think about it – that could equal an additional 50 percent of taxes.

How is that possible?  Up to 25 percent for each of the failures to make estimated payments and for interest on the underpayment of taxes…  And, no one wants to see that.  So, what should you do, especially since an estimated tax payment will soon be due? 

If you are uncertain about making estimated payments, visit irs.gov and search for Form 1040-ES, Estimated Tax for Individuals.  There is a worksheet for you to plug in numbers and perform a calculation to see if you are on track for your payments.  Or, if you have wages and taxes that are being withheld, speak to your payroll department about having additional taxes withheld from your paycheck. 

There are several options available for making estimated payments.  You can have the payments paid directly from a bank account, you can pay by credit or debit card, you can use the Electronic Federal Tax Payment System, and last but not least, you can mail a check or money order to the IRS.  (If mailing the payments, I recommend that you send them via certified mail so you have a receipt for when you actually mailed the same.)

Don’t pay more in taxes than you need to, but do meet your obligations.  Remember, estimated tax payments are due April 15, June 15, September 15 and January 15.  DON’T BE LATE.

This year, tax season was extended to May 17, 2021; an extra month to file those Forms 1040 or to request an extension to file.  You may have timely filed the Form 1040 or Form 4868 for an extension, but you receive a notice from the IRS about your return not being filed timely or that your extension request cannot be granted because it was not timely filed.  Or, perhaps you received a notice that you owe penalties for late filing and/or payment.

You know you filed on time, so what do you do? 

First of all, DO NOT ignore the notice you receive.  You should promptly respond to each and every notice, even if you feel you have received the same in error.  In the notices, there is an address for you to respond to via mail and usually a phone number to call regarding the notice.  Those are your two options.  However, I warn you, if you call the IRS, be prepared to either wait on hold for a while or get an announcement that their call volume is great and to call back later.

My suggestion is to communicate via written means.  This gives you a paper trail.  How should you proceed?  Well, hopefully you have some confirmation of the filing of your return, either through software you used to prepare the return acknowledging the filing and acceptance of the return, or if you filed on paper, you mailed the return via Certified Mail.  The green and white certified mail receipt is your proof of filing.  Further, if it was mailed by certified mail, you are able to go onto the USPS website and track your mailing.  You will be able to get verification that the packet was received by the USPS and the delivery information.  This is the only way to verify the mailing of a return.  If you use a commercial courier service, the IRS does not necessarily recognize their tracking as proof of filing.

OK, so what should you send in response to the notice?  Include a complete copy of the notice with a letter explaining how you filed your return and include any confirmation of filing documentation – certified mailing slip or printout from your software.  If you owed taxes and paid via check or credit card well before the due date, provide proof of payment which will show that your taxes were timely paid. 

Hopefully, you have this documentation to prove that you were not delinquent and the IRS erred in sending the notice.  Yes, it is frustrating, but there is no other way.  You can keep on top of your account with the IRS by going to their website and getting a transcript of your account at www.irs.gov/individual/get-transcript.  (If your taxes were prepared by a paid preparer, they are not able to get the transcript information for you.  However, if they filed your return electronically, they can provide you with the electronic filing information.) 

Don’t feel bad if you don’t get such a love note from the IRS – remember, no news is good news!!!!

Take a look at your paystub and you realize the amount of taxes that are being withheld from your pay.  It can be disheartening, but that is the way we pay our taxes if we are employed.  If you don’t get a paycheck with withholdings, then you may be required to make estimated payments throughout the year.  Why can’t we hold on to our money until the payment is due?

Well, in the US, our income taxes are basically on a pay-as-you-go method.  We are expected to pay as we receive the income.

But, what happens when there are not enough taxes paid on your account throughout the year?  Well, you could be subject to penalties and/or interest for failure to pay or underpayment.  Paying even more is harder yet. 

So, what can you do to ensure that enough taxes are being paid to avoid any interest and/or penalties?

First of all, if you are a W-2 employee, make certain that your employer is withholding sufficient taxes.  If you want to do an analysis, go to IRS.gov and access the Tax Withholding Estimator.  With the entry of certain information, you can be provided with guidance on the amount of taxes that you should be having withheld.  Your employer’s payroll individual can also further assist you.

If you are not a W-2 employee, then you are most likely (or should be) making estimated payments to cover your tax liability.  If you underpay or fail to pay, you can be subject to penalties and/or interest as well.  The amount to be paid is usually based on your prior year’s tax liability.

While we all like to receive a refund, your refund is non-interest bearing.  Careful consideration should be given to having the proper amount of taxes withheld so that you are not having excess withholdings or if you are making the appropriate estimated payments.  On the flip side, you want to make certain that you are having sufficient withholdings or making sufficient estimated payments so that you avoid penalties and/or interest for underpayment.  Why pay additional amounts in the way of interest or penalties that you otherwise wouldn’t have to pay?

Keep in mind that if you have life-changing events – birth of a child, adoption, marriage, death of a spouse or dependent child – you may require a re-evaluation of your withholdings long before you realize the impact when filing your income tax returns in the first quarter of the year.

You or someone you know is planning or has taken the step to say “I DO”.  Marriage changes many things and taxes is one of them. Newlyweds should know how tying the knot can affect their tax situation.  And the effect happens long before you file your first “Married, filing jointly” income tax return.  Here are some things to remember:

• If you are changing your name upon marriage, notify the Social Security Administration as soon after the wedding as possible.  You want to make certain that their records have been updated before you file your return and expect to receive a refund.  If not, your refund could be delayed.  To update information, taxpayers should file Form SS-5, Application for a Social Security Card. It is available on SSA.gov, by calling 800-772-1213 or at a local SSA office.
  
  
• If you will be changing your address, you should notify the IRS by filing Form 8822 – Change of Address and by filing a change of address form with the US Postal Service.
  
  
• You may need to consider your withholdings from your wages.  It is necessary that you give your employer a new Form W-4 within 10 days of your marriage (this is something that could be done in advance and you request your employer to hold implementation of the updated information until after your wedding).  Failure to do so could result in improper withholdings, which is better to address sooner rather than possibly learning of an added tax liability when you file your first joint income tax return.  The Tax Withholding Estimator on IRS.gov provides helpful information in this regard. 
  
  
• Even though married filing jointly is usually more beneficial, the option of married filing separately is an option.  If filing separately, there are certain consistencies between the returns that must be made, such as both spouses must either file using the standard deduction or using itemized deductions.  Each spouse cannot make their own selection. 
  
  
• Even if you marry on New Year’s Eve, you are considered to have been married for the entire year. 
  
  
• Being newly married may subject you to scams, so be cautious.  Remember that the IRS will send a notice via USPS and won’t call you or email you.  (All the more reason to file that Form 8822.)

Best wishes for many years of wedded bliss. 

So, the dreaded news is received – you owe the IRS.  What to do? 

Fear not; there is help available.  It is called an offer in compromise and may help some taxpayers.

An offer in compromise is an agreement between the taxpayer and the IRS that settles a tax debt for less than the full amount owed.  Paying the full amount would create a financial hardship for the taxpayer.  The goal – a compromised amount in the best interest of both the taxpayer and the IRS. 

So, if you are unfortunately in this situation, what are your chances?  The IRS reviews applications based upon the taxpayer’s unique set of facts and special circumstances as well as income, expenses and asset equity.  This is all further detailed in the Offer In Compromise Booklet available on irs.gov.  The booklet covers who is eligible to submit an offer, the cost involved and how the application process works.  The required application forms are included in this booklet.  Currently, the application fee is $205, but, if the taxpayer meets the definition of a low-income taxpayer, the fee may be waived. 

The taxpayer must have filed all required tax returns. 

If you are in an open bankruptcy proceeding, you are not eligible for an offer in compromise. 

Payment options are available by way of a lump sum cash payment or periodic payments.  

If you owe money, visit irs.gov and search for offer in compromise.  You will be able to easily determine if you are eligible to apply.  If not, then by all means, apply for an agreement for a payment plan to pay off your balance over time. 

Don’t ignore a tax liability or the IRS could proceed to seize your assets.  This can result in financial accounts being frozen, your residence being seized, etc.  Don’t become a victim to taxes owed.  Take action one way or another to resolve the issue.

If you are a senior or a retiree, do you know that you can file your income taxes for free using Free File online, including the ability to use direct deposit for refunds?  This is available from various tax software companies, free of charge, and is accessible through the IRS website – irs.gov.   

Using electronic filing enables refunds to be issued faster and avoids the delay of paper-filing.  Last year, with the shutdown of the IRS and backlog of the USPS, many returns were delayed in processing or even delivery.  Some paper filers may still be awaiting refunds. 

So, what are the factors to determine if you qualify for Free File? 

While each Free File partner sets its own eligibility standards, the usual factors include age, income and state residence.  If your adjusted gross income is less than $72,000, you have the ability to use Free File.

Most forms are available using Free File. Even if you have a more complex return, as long as you meet the eligibility standards, you most likely will be able to complete your return. 

Using this resource may help you claim credits and deductions you otherwise may not have claimed. 

Free File enables many state returns to be prepared and filed, although some state returns may have a fee for filing.

Returns can be prepared using a computer, tablet or a smartphone.  All you need is online access to irs.gov.

Some of the software is available in Spanish as the IRS expands resources in various languages.

The Department of Defense has online software available to certain veterans called MilTax.  Happy preparing!

We received a little gift in that the deadline for our 2020 income tax returns was extended until May 17, 2021. While that extension may have allowed us to breathe a sigh of relief, one should not delay preparing and filing their returns. The extra month will come and go before we know it.

If you have filed your return, congratulations. For those who haven’t yet filed, here are some important things to remember:

Deadlines are just that – a DEADLINE.  Individuals have a slight reprieve this year, but don’t get comfortable. If your return is not filed by May 17, 2021, be prepared for penalties – penalties for failure to timely file, penalties for failure to timely pay your tax – and interest on any unpaid taxes. These penalties and interest add-ons could result in a significant increase to your tax obligation. The failure to file penalty could reach a maximum of 25 percent of unpaid taxes. Penalties for late payment could reach 6 percent per annum. 

If you can’t file your taxes by May 17, 2021, file for an extension. That can give you a five month extension until October 15, 2021 and could save you the late filing penalties. 

If you owe taxes, you can pay by credit card or check. If paying by check, make certain that your social security number is on the check along with a notation of Form 1040 and the year to ensure proper crediting to your account. 

Keep in mind that the stimulus checks you may have received during these COVID times are not taxable as they are not considered income. 

If you received unemployment benefits, they are not taxable for federal purposes. 

Did you make charitable contributions last year but can’t itemize deductions?  This year, you can deduct up to $300 in cash contributions made to qualified charities during 2020 directly on your Form 1040. Bear in mind that this is a maximum deduction per household, not per taxpayer. 

If you are age 65 or older, you can take advantage of a larger standard deduction based upon your filing status, age and blindness. This could increase the deduction by $1,300, $1,650 or even double those amounts depending upon your qualifiers.

These are but a few important tips to keep in mind when thinking taxes. Happy filing!  (And don’t wait until May – do it sooner rather than later!)