Struggling with Tax Debt? Here are Some Tips
Tax PlanningDo you feel like you just can’t get ahead when it comes to your tax bill each year? If so, you’re not alone. Every year millions of Americans are faced with a tax bill that they cannot afford to pay off all at once. Sometimes this is the result of an unforeseen circumstance, other times it happens because of poor planning or worse, poor advice. Regardless of the cause, knowing you owe the IRS money is stressful. To make matters worse, many of the taxpayers who find themselves in this position are the ones who need to be making estimated payments throughout the year. But the need to allocate any available funds towards the IRS or state tax debt makes paying estimated taxes almost impossible.
Below we detail a few recommended steps to take to try to get ahead of the tax bills. Every tax situation is different so be sure to check with your CPA or tax professional for advice and tax planning assistance.
1.) Request a payment plan from the IRS for the current or past due debt
You’ve filed your taxes and been hit with a bill from the IRS that you simply cannot afford to pay. It happens! Good news: the IRS does have payment plan options available.
Short-Term Plans are those payment agreements for 120 days or less. These plans do not have a cost associated with setting up the agreement. Payments can be automatically debited from a bank account or paid by phone or online. Credit card fees do apply and interest and penalties will be incurred until the balance is paid in full.
Long-Term Plans are also called Installment Agreements and payments may be spread out over as many as 72 months. Two long-term options are available. The option with the lowest cost of set-up is the Direct Debit Installment Agreement (DDIA). Set-up fees range from $31 to $107 depending on the method you use (phone, mail, online, or in-person). With this option, debits are made directly from your bank account each month. The second option has set-up fees ranging from $149 to $225. With option 2, taxpayers can pay by phone or online using their bank, credit card, check, or money order. As with the short-term plans, credit card fees apply and interest and penalties will continue to be incurred until the balance is paid. Low income options are available to reduce the set-up fee.
State payment plan options are also available. Check with your state taxing authority for more information. GA taxpayers, visit the GA Department of Revenue here.
2.) Make estimated payments, even if it’s not a large amount
Now that you’ve set-up your payment plan, it’s time to take steps towards ending the cycle of tax debt. Commit to making estimated payments, even if they won’t cover your entire expected tax bill. Penalties and interest are calculated on the balance due if your balance due at tax time is more than $1,000. Reducing your April 15th bill by even a few thousand dollars will cut back on the penalties and interest.Your CPA can help you determine estimated payment amounts and provide you with payment vouchers and instructions. You can also access blank federal estimated payment vouchers here. Your state taxing authority should also have blank estimated payment forms available for you.
3.) Be sure your estimated payments are applied to the current year, not the debt from the previous year(s)
There is a risk that the IRS or state taxing authority will misapply your estimated payments towards your previous year balance even if they have accepted your request for an installment agreement or payment plan. Avoid this by following estimated payment instructions very carefully and NEVER make your estimated payments online (while you have an outstanding balance). Submit the payment, with the appropriate information included, along with your completed payment voucher. You should also set-up an online account with the IRS to view your balance due as well as estimated payments that have been applied to the current tax year. Be sure to keep very good records including copies of checks and payment vouchers for estimated payments and dates and methods of payment for installment agreements or payment plans.Keep on an eye on your payment activity. Don’t wait until tax time to try to correct months of misapplied payments. If you believe that a payment has been misapplied, call the IRS immediately and seek resolution. Find contact information here.
4.) Keep your records organized to maximize savings at tax time
In addition to keeping detailed records of installment payments and estimated payments, you should also make sure you are keeping good records of income, expenses, donations, and other write-offs during the year. This will help to reduce your tax liability each year.
Looking for ways to reduce your tax liability? Here are a few ideas:
- Contribute to retirement accounts and if you are over 55 take advantage of the additional catch-up contribution allowance. This can greatly reduce your taxable income.
- If your employer doesn’t offer retirement savings, consider a SEP IRA. This will help you save for retirement while reducing taxable income.
- Contribute towards your HSA to save for future medical expenses while reducing your taxable income.
- If you are in the RMD phase of a retirement account, be sure to take the appropriate distribution to avoid a sizable tax penalty.
- If you are self employed or a contractor, be sure to keep good records of expenses and other deductible items like mileage. Many IRS-compliant apps are available to make this easier.
- Keep documentation of any donations you make including both cash and non-cash contributions (clothing, toys, etc). For cash contributions, your records should include the amount and the organization to which you donated. For non-cash, you should document the date, organization, brief description of donations, and an estimated value at time of donation. Be sure to keep the receipts from the organizations to which you donated.
- Do you pay for your kids to go to summer camps? While extracurricular activities like sports or music lessons are not deductible, summer camp expenses and other childcare costs are. Be sure to provide your tax preparer with the statement from the childcare/camp facility that includes total cost for the year and EIN (or SSN if you pay a nanny or babysitter)
If you feel like you cannot get out from under your tax debt, speak with your CPA or tax preparer about tax planning services. You don’t have to go it alone! These trusted professionals can be a great resource. If you’d like to take advantage of Levesque & Associates planning services, get in touch with us and we can set-up a call or in-office meeting.
Helpful links:
Learn more about payment plan options and view the application process here - https://www.irs.gov/payments/payment-plans-installment-agreements
Download the IRS form to apply for an installment agreement here - https://www.irs.gov/pub/irs-pdf/f9465.pdf
Can’t pay the tax bill for your business? Learn more about payment plan options here - https://www.irs.gov/payments/online-payment-agreement-application
Blank IRS estimated payment vouchers for individuals - https://www.irs.gov/forms-pubs/about-form-1040-es
IRS contact - https://www.irs.gov/help/telephone-assistance