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How Low Can I Owe?
If You Dread Tax Time, Here’s How You Can Ease—and Even Postpone—the Pain
By Reginald R. Owens, Ph.D.
o you can’t pay your taxes. Don’t despair. You’re not alone. First, let’s understand that Uncle Sam can’t pay our bills if we don't all make our contribution.
You can argue about whether the tax system is fair, right, just, or necessary, but in point of fact, most of us have benefited in some form or other from the Government’s ability to act in our collective interest. In addition, many of us have benefited individually and directly in everything from educational assistance to employment opportunities, which are, as much as possible, free from the gender, age, and racial bigotry you might on occasion encounter in the general-employment marketplace. If the Government has no money, it can’t fund these programs.
That’s where you and I come in. But I also know that “things happen.” Below, you’ll find some tips for minimizing the amount you owe, plus some strategies for dealing with the IRS if you can’t pay on time.
WHITTLING AWAY AT THE BOTTOM LINEFirst, let’s look at some ways to get that number down: If you owe money, chances are that you’re claiming too many exemptions and you should ask your payroll department to record fewer for you. If you’re claiming four exemptions, for example, ask that the number be lowered to three or even two, so that more money is deducted from each pay check throughout the year. If you file a joint return, then it’s even more important to make sure that the number of exemptions you and your spouse claim will not leave you with a tax bill at filing time. You can even ask your payroll department to deduct more than is necessary, so that you will not end up owing come April 15.
Conversely, keep in mind that if you are receiving a larger refund than you’d like to get at tax time, and you’d rather be able to put that money in your pocket (or savings account) throughout the year, you can adjust the number of exemptions you claim with your employer upward – even if that number exceeds the actual number of exemptions you might claim at filing time.
Tip: The IRS provides a handy withholding calculator on its site, www.irs.gov , that can help you determine how much you should have deducted each pay period so that you don’t get an unpleasant surprise on April 15.
The next step is to be sure that you are taking every deduction that you are eligible for. Some “loopholes for the common man or woman” include:
The Earned Income Tax Credit (EIC): Often misunderstood and too often overlooked, the EIC is for low-salaried working people who, depending on specific income and family size, may be eligible to receive a refund even if they do not owe or pay taxes. The IRS Web site, www.irs.gov, has a section that provides eligibility guidelines. If you want the IRS to figure this provision for you, simply write EIC directly to the right of Line 61a on the 1040 tax form, or to the right of “Page 15” on Line 9a of Form 1040EZ. By the way, any refund you receive will not affect your eligibility for Temporary Assistance for Needy Families (TANF), Medicaid and Supplemental Income (SSI), or for food stamps and low-income housing.
The Child Tax Credit: Happily, for parents, the child tax credit has been raised this year—you may be able to take up to as much as $600 for each qualifying child. You may also be eligible for additional child tax credits (see Lines 48 and 63 on the 1040.) Also, consider whether the following family-related deductions apply to you:
Student Loan Interest. If you paid interest on a qualified student loan, you may be able to deduct up to $2,500 of the interest (Line 24 on 1040).
Alimony Payments. You may be eligible to take these as deductions.
Child and Dependent Care Expenses. You may be able to take this credit, if you paid someone to care for your child under age 13, or your dependent or spouse who could not care for himself or herself.
Education Credits: These include the HOPE Scholarship Credit (you may be eligible for this deduction for qualified tuition and related expenses for the first two years of college, if you, your spouse or dependent are enrolled in or attended an eligible educational institution) and the Lifetime Learning Credit (covering the first two years of college for yourself, your spouse or dependent).
IRA Deductions. Depending on your income, if you’ve stashed cash in an IRA, you may be eligible for an IRA deduction (Line 23 on 1040). Remember, you have until April 15 to contribute the maximum amount allowable to an IRA and still be able to deduct it this year.
Standard Mileage Rate. The rate for business use of a vehicle is 34.5 cents per mile. Most business owners know this. But did you know that there is also a 12-cent-per-mile rate for mileage to and from medical care?
Other Nontaxable income. Do not report Federal nontaxable income, such as child support, money or property that was inherited, willed to you, or received as a gift, or life insurance proceeds received because of a person’s death.
Know What Your
State and Local Taxing Authorities
Are Tax Refunds Taxable? Remember that your Federal tax refund is not taxable, as long as you did not itemize deductions when you filed for the year in which the refund was granted.
Job-Hunting Expenses: Everything from the cost of resume preparation to the purchase of newspapers and transportation to and from interviews is deductible, as long as you are searching for a job in the same field you’ve been working in—even if you don’t get the job you apply for.
Charitable Donations: Besides monetary contributions to your favorite charities, you can deduct the value of goods donated to organizations such as the Salvation Army or Goodwill. Be sure to ask for a receipt; these donations can often add up to hundreds of dollars.
Mortgage Credits: Don’t overlook qualified mortgage-interest credits, including home-equity interest and points. With interest rates low, many people have refinanced their homes this year. What you need to know: whereas points on a first mortgage are fully deductible, points on a refinanced loan are amortized over the life of the loan, but that’s still something that will help to help lower your tax bill. If the refinanced amount is more than your existing balance, and you plow the excess into improving the property, the entire amount of the points is immediately deductible.
A Word About Windfalls: If you receive an unexpected bonus, a lump-sum payment, or win the lottery, you can ask the involved organization to deduct more than the amount of taxes required by law. In my opinion, it’s a lot easier to get a refund than to figure out how to deal with an unpaid tax bill or tax bills (one from the Federal government, one from the state, and one from the local authorities) later on.
ADVANTAGES OF BEING THE BOSS If you own a business, you should revisit the manner in which your business is viewed from a legal perspective to be sure that you are using the incorporation method that works best for your particular circumstance. Should your business be a “Sole Proprietorship,” a Limited Liability Corporation (LLC, LLP or PC ), or a Conventional “C” or “S’ corporation?. Ask your accountant and/or lawyer about the advantages of each incorporation method. (Their services are deductible.) Can’t afford one? Call the local legal-aid society for referral and help.
Special Deductions for the Self-employed: You may be eligible to deduct part of the premiums paid for health insurance for yourself, your spouse and your dependents. If you’re an owner or partner, you may be qualified for the Self-employed SEP, SIMPLE, and Qualified Plans deductions. Don’t forget the 34.5-cents-per-mile standard mileage rate for business use of a vehicle—and be aware that even a trip to the nearest Staples for staples qualifies. Set up a system so that you can keep good records of your mileage and other expenses throughout the year.
A word of warning about home-office deductions: the IRS is cracking down on fraud in this area, and the definition of what constitutes a home office is strict. A set of file cabinets and a desk in your bedroom won’t cut it. So check the IRS rules on this (go to www.irs.gov) before you even think about taking this deduction.
If you have hired employees who live in certain “empowerment zones,” you are eligible for the Empowerment Zone Employment Credit (Form 8844), which applies to businesses that hire individuals who live and work in empowerment zones in New York City, Chicago, Atlanta, Los Angeles, Philadelphia and Washington, D.C. For more information, see Publication 954, “Tax Incentives for Empowerment Zones and Other Distressed Communities.” A chance to do well by doing good, this is a hiring option worth considering, if you haven’t already done so.
GET A HEAD START Finally, if paying your taxes is a painful rite of passage, casting a dark shadow over your springtime every year—you might want to consider breaking down your payments by paying estimated taxes four or more times a year. Form 1040ES can be used for this purpose. How it works: The IRS gives you a series of due dates and keeps a record of your payments and the estimated amount you owe each period. Your Social Security Number becomes your account number. Dividing the payments up can make the whole process seem more manageable.
POSTPONING THE INEVITABLE Still can’t pay? Well, here are a few things you can do to postpone the inevitable:
File an Extension:
The Federal Government provides for an automatic extension of filing time
for individual returns. Complete Form 4868, and make sure that you mail it
before April 15. I recommend certified mail, return receipt requested. You
will then have until August 15 to file your return. Technically, this
doesn’t get you off the hook; you’re still expected to send the estimated
amount you owe into the IRS by April 15. If you don’t send the funds, or
your estimate is wrong, just keep in mind that when you do submit your
return and payment, interest will be charged (8 percent per year), as well
as a penalty (one-half of one percent per month) on the tax that is paid
late. The advantage of filing for an extension is that you eliminate the
additional penalty for filing your return late (a 5 percent per month fee,
with a 25 percent maximum). When filing an extension, it’s to your benefit
to at least send in as much of the estimated tax owed as you can, so that
you can minimize the penalty and interest payments.
If you need still more time to calculate your tax, the IRS provides for an additional extension until October 15. This is not automatic. You must submit your request for a second extension by August 15, using Form 2688. The IRS will generally send you an approval or denial of the request, with your new due date, within seven days.
Apply for the Installment Plan: Using Form 9465, you can apply for a payment plan, which, if approved, will allow you up to 60 months (five years) to pay the amount you owe. After you file the form, it will generally take the IRS 30 days to respond to your request. However, be aware that it might be cheaper to take out a bank loan to pay the full amount on time than to pay the IRS over time, taking into account the penalty and interest rates the IRS will charge you.
Submit an Offer in Compromise: If the total amount owed is greater than the sum of your assets and future income, or if you can prove an economic hardship or other special circumstances, the IRS may accept less than the total balance due. Submit a reasonable offer in compromise by completing Form 656.
Ask for “Forgiveness” of State and Local Taxes: Some states provide for forgiveness of unpaid taxes. The forgiveness credit may allow eligible taxpayers to reduce all or part of their state or local tax liability. The credit generally gives back some taxpayers their state tax and forgives some taxpayers their liabilities, if they have not paid. Check with your state revenue department or accountant to determine if you might be eligible.
Consult the Taxpayer Advocate: To find out more about what your options are if you can’t pay, call the Taxpayer Advocate. The Advocate is an independent ombudsman whose job is to protect your rights, help you resolve problems and represent your interests to the IRS. You can contact the Taxpayer Advocate, toll free, at 1-877-777-4778. TTY/TDD help is available at 1-800-829-4059. The Advocate’s advice and counsel are free. Just another service paid for by . . . you and the taxes you pay! _________________________________ Reginald R. Owens, Ph.D., writes frequently for magazines on topics relating to finance and business management. He is the Publisher of MAKING BREAD magazine. |
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