November 30, 2018
Q: I am on the road and cannot get my taxes filed on time. What should I do?
A: You should file an “Application for Automatic Extension of Time”, Form 4868. An extension means that you are extending the filing of your income tax return for six months until October 15, 2018. However, it is not an extension of time to pay any taxes due. Therefore, if you think you are going to owe money on your 2017 return, you should get it paid by April 17, 2018, so you can eliminate the late payment penalty. A general rule in most cases is to have paid in 110% of the total tax from your 2016 tax return. You will have to estimate the amount of tax due on Form 4868. The IRS can invalidate an extension if tax is understated. An extension is valid even though the tax estimated on Form 4868 is not paid. Even with an extension, if you owe taxes and pay the balance when you file your tax return after April 17, the IRS will charge you late payment penalties and interest.
Q: My husband and I just completed our tax return which shows we owe more money than we can pay. What can we do?
A: File the return on time or file for an extension to avoid the late filing penalty of 5% per month up to 25%. If you think you can make the payment within a few months of filing, pay as much as possible with the return or extension. Mail the balance when you receive the IRS notice of tax due. PAYING BY CREDIT card is another option, however, a percentage of the tax due is charged as a convenience fee plus interest at the credit card rate. That can be costly. And lastly, YOU CAN REQUEST AN INSTALLMENT AGREEMENT. The IRS will usually accept installment agreements by filing Form 9465 with your income tax return if the unpaid liability is $50,000 or less and the tax will be paid within six years. The IRS will usually accept an agreement if the unpaid liability is $10,000 or less and will be paid off within three years and all income tax returns have been filed. Any taxpayer who has an installment agreement for a prior year cannot file another Form 9465. In that case, they will have to negotiate with the IRS.
If the amount owed is greater than $50,000 you must attach a Form 433F (Collection Information Statement). Also attach a 433 F if the amount owed is more than $25,000 but less than $50,000 and you do not agree to make payments monthly by electronic funds transfer or you cannot pay off the amount owed within 72 months.
You can also create your own online payment agreement (OPA) at WWW.IRS.GOV . There are short and long term agreements depending on how much you owe and how long it will take you to pay it off.
Q: My husband is an owner-operator and we have 4 kids and a home. Why do we owe so much money on our taxes with all our deductions?
A: As a self-employed individual you are taxed on your net self-employment income. This is in addition to your federal income tax. There are many instances where your itemized deductions and your number of exemptions combined will be close to or exceed your adjusted gross income. This will result in a low or zero taxable income which relates to a low or zero income tax. However, your self-employment tax is (15.3%) of your net self employment income. Self-employment tax is actually Social Security and Medicare tax, otherwise known as FICA for employees. Employees pay half the required amount based on income and their employer pays/matches the other half. Self-employed individuals, however, are required to pay both sides themselves, double what an employee pays on the same earnings.
TAX TIP – The first installment of your federal and state estimated income taxes are due April 17, 2018. Pay it to avoid penalties and spending money that needs to be set aside for taxes.