Saturday, April 9, 2011

What to Do If You Owe Taxes

Many of us already have gotten the bad news -- Uncle Sam is going to hand us a bill. About one in four tax returns have a balance due, according to the Internal Revenue Service. And that could be painful. In 2008, the average bill was a whopping $5,000.

The good news is that there's still time to plan, and you have a number of options before taxes are due on April 18.

Federal taxpayers can choose between swiping and putting the balance on a credit card, starting a payment plan with the IRS, and of course, just paying the bill in full.

If you have the money, your best options include writing a check, making an electronic payment when you e-file your return, or enrolling in the U.S. Treasury's free service for paying federal taxes electronically, the Electronic Federal Tax Payment System.

But even if you can't pay the balance now, make sure to file your tax return by April 18, or request an extension in order to avoid late filing penalties, says Melissa Labant of the American Institute of Certified Public Accountants. Late filing penalties are normally 5% of the tax owed for each month your return is late, for up to five months, according to the IRS. And that's in addition to late payment interest and penalties on taxes owed.

Be sure to let the IRS know you can't afford the bill and then "pay whatever you can," says Labant. "Paying something is better than paying nothing." That cuts down on late payment penalties and interest charges since the IRS generally charges interest on any unpaid tax from the day the tax is due to the date it is paid.The interest rate, currently at 4%, is determined quarterly, and is normally set at 3 percentage points over the federal short term rate. And that doesn't include late payment penalties, which are normally 0.5% of taxes owed a month.

Taxpayers who need less than four months to pay off a balance may be able to set up an informal payment plan with the IRS, says Elaine Smith, an enrolled agent and tax professional with H&R Block. Those who need more time can set up an installment agreement with the IRS, where the late payment penalty is reduced to .25% a month. If the agreement is approved, taxpayers are charged a one-time fee of up to $105, but that fee is slashed to $52 for people who agree to have payments deducted directly from their bank accounts. Certain low-income individuals can qualify for a $43 fee.

You can also buy yourself a 30-day extension by putting the balance on a credit card, but you have to go through an IRS approved service provider that will charge a convenience fee of roughly 2% to 2.4%, plus there is the interest charge you might get from your credit card company. (Crunch the numbers because the interest charges on your card may be less than the late payment penalties charged by the IRS).And a "zero percent credit card could buy you even more time," says Smith.

Your options are different if you owe state taxes because some states offer payment plans or let you pay with a credit card and others do not. Contact your state department of revenue to figure out what your options are.

One other important step is to make sure this doesn't happen again, tax experts warn. Use the withholding calculator on the IRS website to figure out if you need to adjust your income tax with holdings on your W4 form. You might find yourself with a tax bill after a big life change -- getting married or divorced, having a baby, moving out of home for the first time, changing jobs and selling a house, to name a few. So make sure to contact a tax professional or consult the IRS if you have any questions.

Jonnelle Marte
Friday, March 18, 2011

Excerpted from Yahoo!Finance, provided by SmartMoney

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Circular 230 notification - Any U.S. federal tax advice that is contained in this document was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

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