Tag: finance

If You Have to File Late, Avoid Penalties and Interest

April 15 is just a few days away. If you won’t be able to mail and postmark your taxes by April 15, you may need to file for an extension. You can request an extension if you need extra time to file your tax return. However, it’s important to note that an extension only gives you more time to file your return; it does NOT mean you have an extension to pay.

All taxes that you owe must be paid by the original deadline. Otherwise, you may be charged a late fee along with an interest. If you fail to file your return on time, you will be penalized with a Failure to File penalty unless you apply for an extension.

Failure to Pay Penalty

A Failure to Pay penalty is assessed on the balance of taxes owed after April 15. The penalty for unpaid taxes incurs a monthly fee of 0.5%, with a maximum penalty of 25% of the unpaid taxes, regardless of whether you filed an extension.

Failure to File Penalty

A Failure to File penalty is assessed based on how late you file and the amount of taxes owed on the due date. This fee is assessed if you do not file your tax return AND you do not request an extension. This penalty is calculated at 5% of the unpaid balance per month and maxes out at 25%.

Both of these penalties may be assessed for the same months. However, the combined penalties will be at most 5% of the taxes owed per month.

In addition to these penalties, the IRS charges interest on past-due amounts. This interest is charged on the taxes owed, the penalty, and the accumulated interest. The more you owe, the higher the interest will be. Interest begins on the day the tax is late and continues until the tax, along with interest and penalties, is paid in full.

To avoid getting in trouble and paying penalties:

  1. File your tax return on time and pay any tax owed by the due date.
  2. If you cannot file your taxes by the deadline, you can avoid a Failure to File penalty by requesting an extension.
    a. The extension must be filed by the due date.
    b. The extension gives you to October 15 to file.
    c. File form 4868 or use IRS Free File to apply for an extension.
    d. You need to enter an estimation of your 2023 tax liability and the amount of
    payments you made in 2023 through withholdings and estimated tax payments.
    e. Include payment for the balance to avoid late penalties and interest. If you cannot pay the balance in full, pay as much as possible.
    f. Estimating high and overpaying is much better than subjecting yourself to late penalties and interest.
    g. It is much better to estimate high and overpay than subject yourself to late penalties and interest.
  3. If you are unable to pay the balance when you file the extension, you should pay as much as you can and apply for a payment plan that will allow you to pay the remaining balance over time.
    a. Apply for a short-term plan if you can pay your taxes owed within 180 days.
    b. Apply for a long-term plan to make monthly payments over some time greater than 6 months.
    c. Set-up fees are applied to long-term plans; this fee is significantly lower if payments will be made by direct deposit.
    d. If payments are made by credit card, a fee will be charged.
    e. You may be able to apply for a payment plan online, depending on how much you owe. Online setup requires a computer using a supported browser and a cell phone that receives text messages.
    f. If you cannot apply online, you will need to complete Form 9465, Installment
    Agreement Request.
    g. For more information on applying for an IRS payment plans, go to
    https://www.irs.gov/payments/online-payment-agreement-application

If you cannot pay your taxes on time, you must establish a payment plan with the IRS. If you do not follow these steps, the IRS can levy your salary, bank accounts, or property. You do not want to get into that situation.

Do I Have to File a Tax Return this Year?

If you are currently retired and living on a small, fixed income or barely making enough money to support your family, you might wonder whether you need to file a tax return this year. The answer is most likely “Yes.”

In 1789, Benjamin Franklin famously said, “In this world, nothing can be said to be certain, except death and taxes.” That has not changed much. Filing a tax return is a requirement of life for nearly every American.

You are required to file a tax return if:

  1. Your gross income was greater than the applicable standard deduction for your filing status.
  2. You had self-employment income of $400 or more.
  3. You owe taxes.

Keep in mind that gross income is not just income earned from working a job. It includes social security and retirement income, IRA distributions, interest and dividends, capital gains, and any other sources of income you might have.

Let’s look at the example of a 90-year-old widow whose social security and retirement benefits total $23,400 annually. Additionally, she received $157 in interest on her savings and a dividend of $384 from stocks. Therefore, her gross income is $23,941. This amount exceeds her standard deduction of $15,700. Consequently, she must file a tax return for the year. It is likely that she had taxes withheld on these incomes and that she is entitled to a refund. If so, filing is not only required, but it is beneficial.

Even if you are not required to file a tax return, you will want to file if (1) you are due a refund on taxes withheld or (2) if you are entitled to claim a tax credit. The most common tax credits are:

  • Earned income tax credit
  • Child tax credit
  • American Opportunity Tax Credit
  • Credit for Federal Tax on Fuels
  • Premium Tax Credit
  • Health Coverage Tax Credit
  • Credits for Sick and Family Leave
  • Child and Dependent Care Credit

If you are still unsure whether you have to file a tax return, you can use the IRS’s Interactive Tax Assistance (ITA). It has an Interview Tool to help you figure it out. The interview is estimated to take 12 minutes to complete. Remember that the tool is only as good as the answers you provide. Access the interview tool here: https://www.irs.gov/help/ita/do-i-need-to-file-a-tax-return

Free Tax Filing Options

Did you know you may be eligible to file your taxes for free? Several free filing options are available, depending on your age, state of residency, and income. You can find a free tax filing option if your Adjusted Gross Income (AGI) is $79,000 or less.

In order to move forward, you will need to determine your AGI for 2023. This information will help us explore the best options available and make informed decisions. Let’s take a moment to calculate your AGI so we can confidently move ahead.

Step 1:  Calculate your total income by adding up all sources of income you receive. Typical forms of income may include:

  • Wages
  • Retirement income
    • IRA distributions
    • Dividends
  • Capital gains
  • business profits
  • interest earned
  • Investment income 
  • Social security
  • Tips
  • Rental income
  • Dependent care benefits
  • Employer-provided adoption benefits

  • Medicaid waiver payments

    Step 2:  Sum up the adjustments made to your income. These adjustments may include: 
  • Half of the self-employment taxes you paid
  • Self-employment health insurance premiums
  • Applicable donations to IRAs
  • Student loan interest
  • Unreimbursed educator expenses

Your AGI is your total income minus your total adjustments.

IRS File Free

The IRS has collaborated with several tax software providers to offer free access to those who meet the requirements. Each provider has its own set of criteria for eligibility. Please visit the provider’s website to determine if their free service is available in your state. Below is a list of the IRS’s trusted partners and a link to their websites.

1040 NOWAGI < $68,000Any agehttps://www.1040now.net
Drake$17k<AGI<$68kAny agehttps://www.1040.com/
EzTaxReturnAGI < $79,000Any agehttps://www.eztaxreturn.com/
FileYourTaxes$8.5k<AGI<$79k< 65https://www.fileyourtaxes.com/
On-Line TaxesAGI < $45,000Any agehttps://www.olt.com
Tax ActAGI < $79,00020 – 54https://www.taxact.com/
Tax HawkAGI < $45,000Any agehttps://www.taxhawk.com
Tax SlayerAGI < $44,000Any agehttps://www.taxslayer.com/
Comparison Free Tax Filing Options

The IRS has a tool to help you determine which of these trusted partners is right for you: https://apps.irs.gov/app/freeFile/general/

  1. Go to IRS.gov
  2. Click “File your taxes for free.”
  3. Select “Explore Free Guided Tax Software”
  4. If you are a first-time free tax filer, select “Find Your Trusted Partner(s)” to find the right preparer for your situation. Or you may browse all the IRS-trusted partners.
  5. Once you use IRS File Free, you will receive an email from the company you used with a link to file for free next year.

Check back next Tuesday for another tax tip to help you decide whether to itemize your deduction or take the standard deduction.

Control Spending for Those You Love

Your health and relationships can be affected by your spending and budgeting habits. For the sake of those you love, you should prioritize managing your budget and living within your means. Buying your loved one the perfect gift on Valentine’s Day is a way to express love and provides a great sense of satisfaction unless you cannot afford the gift. 

When the credit card bill arrives, and you do not have the money in your checking account to pay it, it leads to debt and stress. If you have planned and set some money aside, you may be able to take the money out of your savings. Otherwise, you pay a portion of the bill and carry a balance forward.

If spending beyond your means is rare, you likely can recover with a few months of cutting back on “extras.”  However, if it is a regular occurrence, your balance will increase each month due to accumulated interest and new purchases.

In America, credit card balances currently top more than $1.13 trillion. Transunion estimates that the average American has credit card balances of $6,088, and Money magazine estimates the average non-mortgage debt at nearly $21,800. Many Americans are stressed about their finances. This stress is harming their health and their relationships.  

Financial stress leads to physical challenges, including anxiety, depression, high blood pressure, migraines, aches and pains, and difficulty sleeping. These physical ailments can make you irritable and have wild mood swings. All of which is hard on those you love. You and your spouse may fight about money. You may find yourself avoiding the company of others and become more and more withdrawn from social life. This is not a healthy way to live.

It is essential to recognize that debt is a form of bondage. The Bible says, “The rich rule over the poor, but the borrower is servant to the lender.”  Proverbs 22:7

The antidote to debt and stress is to take control of your finances. If you need a place to start, try working through the following suggestions to climb out of debt. Write them down and put them on the frig. Keep it in a prominent place in the house where you will see it and be reminded and encouraged each day. 

  • Immediately forego all unnecessary expenditures.
  • Work with your spouse to create a budget you can both live with.
  • Designate a sum of money to pay toward existing credit card balances.
  • Track your spending so you are aware of where your money is going.
  • Include some “fun” spending in your budget. If your budget is too strict, you will feel punished, and it will be challenging to stick with it.
  • When you need to make a significant purchase, research the item for the best price.
  • Employ the “24-hour rule” for non-essential purchases. If an item in the store tempts you, wait 24 hours. Ask yourself if you need the item and what you will give up in order to afford the item.

Here are some suggestions on how to plan to avoid temptations to spend beyond your budget.

  • Make a grocery shopping list and stick to it. Determine how much you can spend and don’t exceed your limit. Some people use cash and only take the budgeted amount to prevent overspending.
  • Pack lunches and snacks for work. Brew coffee, take it with you, or buy coffee pods and make coffee at work.
  • Invite friends over for home-cooked meals and game or movie nights rather than going to expensive restaurants and expensive activities.
  • Avoid surfing Internet shopping sites that might tempt you to buy things you do not need.
  • Tape television shows and fast forward through commercials to further avoid the enticement of slick advertisers.

This Valentine’s Day show your true love for your spouse and family members by committing to reduce your debt and lower your financial stress. Your physical health and relationships will improve if you do.