Tax season has arrived and many Americans are still struggling financially. The recent economic crisis is still having a dire impact on the ability for families to manage their day to day finances. It is no surprise that an increasing number of people are having trouble meeting their income tax obligations. So what can you do if you find yourself unable to pay your income taxes?
Do not panic or procrastinate. IRS tax notices and balances due on recently filed tax returns can bring out a lot of negative emotions. Once you recognize that you owe taxes to the IRS take action immediately. Just because you cannot afford to pay the taxes due immediately does not mean there are no options. Many people make a tax problem worse by procrastinating or avoiding it altogether.
Create a financial plan. The creation of a financial plan is the single most important step to take when you owe taxes to the IRS. Why? A financial plan provides the guidance needed to help you address the tax situation and other important financial life goals. Unfortunately, most people tend to avoid this step altogether. When working with clients experiencing tax debt problems I refer to their financial plan as a tax resolution plan.
In order to resolve tax problems the most cost-effective way possible you need a tax resolution plan. The ultimate goal should be to get out of debt quickly so you can focus on other more important aspects of your financial life. Goals such as saving for your child's education, retirement, paying off debt, buying a house, etc. are difficult to achieve if you owe the IRS. A financial plan will also help you with future income tax planning. Some areas of focus could include maximizing all potential tax deductions, reducing future taxes, tax efficient investing, and planning ahead for future tax related events.
File your taxes. Go ahead and file a tax return even if you cannot pay the taxes owed in full. This will eliminate the failure to file or late filing penalties. In many cases the IRS will not work with you until you have filed all past due tax returns.
Stay current with future tax obligations. While you are working to resolve your tax debt problems you must stay current with your tax obligations. For self-employed individuals this requires you to continue (or begin) making estimated tax payments. If you are a wage earner you need to make sure that you are having sufficient taxes withheld from your pay.
Establish a plan. By following the financial planning process you should obtain a good understanding of where you stand financially. Complete a net worth analysis that explores everything you own and everything you owe to others. You will also need to complete a cash flow analysis that looks at your income and expenses. These two factors are critical when exploring all of your available options to resolve the tax debt.
Explore all available tax resolution options. If a taxpayer cannot pay taxes owed in full, the most common tax resolution alternative is to establish a payment plan or Installment Agreement. Other alternatives include Partial Payment Installment Agreements, Currently Not Collectible Status, bankruptcy, or requesting an Offer in Compromise. If you are considering an option other than setting up a payment plan you should consult an Enrolled Agent, CPA, or tax attorney.
Follow the plan and take action. Tax debt resolution requires discipline and planning. If you follow basic elements of the financial planning process you will be able to get out of debt sooner and move on with your life. Tax problems are stressful. However, effective solutions do exist for those that take action and follow a tax and financial plan.
For more information on the LifeSpan Process of Tax Resolution and Financial Freedom contact LifeSpan Financial Planning at 843-469-3505.
Showing posts with label income tax planning. Show all posts
Showing posts with label income tax planning. Show all posts
Wednesday, February 3, 2010
Friday, January 22, 2010
Tax Season is Back: Tax Tips for your 2009 Return
Believe it or else, tax season is back. The arrival of the 2009 tax filing season reminds us that income tax planning is a year round effort.
As a comprehensive financial planner I encourage clients to understand how tax related decisions impact their overall financial plan. Contact a fee only financial planner or tax professional (CFP, CPA, EA) if you have any questions regarding the tax planning component of your comprehensive financial life plan. Always make sure that your professional support system is working together as a team with your best interests at the forefront of every decision. In the meantime, check out these basic filing tips:
• Employers are required to send W-2 forms to employees by the end of January.
• The American Opportunity Credit for Education Expenses gives credit up to $2,500 per student for qualified households. This credit is designed to help Did you purchase a car through the Cash for Clunkers program? That money is not taxable and should not be reported on your 2009 tax return.
• The first $2,400 of unemployment benefits received by jobless taxpayers in 2009 are not taxed. Unemployment benefits over $2,400 are taxable.
• Check the credentials of your tax preparer. Only attorneys, CPAs and Enrolled Agents can represent taxpayers before the IRS in all matters, including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared.
• Use a reputable tax professional who signs the tax return and provides a copy.
• Use caution if a tax preparer claims they can obtain larger refunds than others. Large refunds are often a sign of poor planning and are equivalent to loaning the federal government your money in return for zero percent interest. Not a great idea!
• Electronically file your returns. Taxpayers who use e-file and direct deposit can get a refund in as few as 10 days.
• Taxes must be filed by April 15 unless you are granted an extension. Keep in mind an extension to file is not an extension to pay.
As a comprehensive financial planner I encourage clients to understand how tax related decisions impact their overall financial plan. Contact a fee only financial planner or tax professional (CFP, CPA, EA) if you have any questions regarding the tax planning component of your comprehensive financial life plan. Always make sure that your professional support system is working together as a team with your best interests at the forefront of every decision. In the meantime, check out these basic filing tips:
• Employers are required to send W-2 forms to employees by the end of January.
• The American Opportunity Credit for Education Expenses gives credit up to $2,500 per student for qualified households. This credit is designed to help Did you purchase a car through the Cash for Clunkers program? That money is not taxable and should not be reported on your 2009 tax return.
• The first $2,400 of unemployment benefits received by jobless taxpayers in 2009 are not taxed. Unemployment benefits over $2,400 are taxable.
• Check the credentials of your tax preparer. Only attorneys, CPAs and Enrolled Agents can represent taxpayers before the IRS in all matters, including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared.
• Use a reputable tax professional who signs the tax return and provides a copy.
• Use caution if a tax preparer claims they can obtain larger refunds than others. Large refunds are often a sign of poor planning and are equivalent to loaning the federal government your money in return for zero percent interest. Not a great idea!
• Electronically file your returns. Taxpayers who use e-file and direct deposit can get a refund in as few as 10 days.
• Taxes must be filed by April 15 unless you are granted an extension. Keep in mind an extension to file is not an extension to pay.
Thursday, July 30, 2009
Taking Control of your Income Tax Planning
It is no surprise that most Americans dread April 15th when the deadline looms for filling out federal and state income tax returns. On the surface, learning the tax code can appear more complicated than learning a new language. In fact, sometimes I read the tax code and wonder if the IRS is speaking English.
Have you ever vowed to yourself at tax time that you will be better prepared "next year" only to experience the exact same frustration when next year arrives? It is becoming a popular New Year's resolution for people to promise themselves that they will do a better job at maintaining accurate records and getting organized, or that they will pay closer attention to possible tax-saving measures. Unfortunately, many people simply do not follow through with that commitment.
Engagement in the tax and financial planning process provides taxpayers with an opportunity to take control of their income tax concerns. Instead of being a typical taxpayer and waiting for the deadline to arrive, you should plan ahead and file your tax returns prior to the April 15th deadline. Most importantly, you should file those tax returns with confidence that you are in control of your financial destiny. You may even decide to go ahead and schedule your own deadline of March 15th or April 1st and hold yourself accountable to a self-imposed deadline to defeat the temptations of procrastination. If everything goes smoothly you should celebrate your step toward total tax and financial freedom.
Disclaimer: Please note that the term "tax freedom" does not mean you will likely ever be completely free from paying taxes in this country. However, tax freedom can be achieved by taking control of your tax situation and minimizing the impact of current and future taxes with a plan that works.
Whether or not you choose to use the services of a tax professional is a personal decision and depends on your individual level of confidence with tax and other financial matters. For most taxpayers with a history of recent tax and financial problems I suggest the use of professional tax preparation services for at least a couple of years. At a minimum you should at least use some type of tax preparation software to assist with the process. Turbo Tax, Tax Wise, and Tax Cut are some of the most popular software programs that my clients have used successfully to help prepare tax returns.
Tax planning is more than just trying to reduce your overall taxes. Income tax planning decisions should always be part of your overall financial life plan. Always coordinate tax planning with your comprehensive financial planning goals and objectives. If you are working with a CPA, EA, or other tax professional be sure that they are communicating with your financial planner or other financial advisory team members.
Holistic tax planning requires a deeper focus than just trying to lower taxes. Tax reduction is great. However, it is more meaningful when used in conjunction with bigger picture planning. If you have not done so already this year, take a few moments to review your income tax plan. Don't have a formal tax plan in place? It is not too late to start. Next tax season is not too far away and will be a lot more enjoyable for the taxpayers that take the time to prepare for April 15th throughout the course of the year.
Wednesday, July 22, 2009
Tips to Stay Current with Estimated Tax Payments
Estimated tax payments are required on income that is not subject to withholding. The most common types of income that results in estimated tax are earnings from self-employment, interest, dividends, alimony, and rental income. Here are some basic tips related to estimated tax obligations.
Calculate your estimated tax payments
Many taxpayers have difficulty predicting what their actual income from self-employment and other sources (rental properties, investments, etc.) will be from year to year. Form 1040-ES is the form that is used to calculate required estimated tax payments. Use this form to calculate estimated taxes. Unless you anticipate significant changes in income, it is generally a good idea to make estimated tax payments based on 100% of the previous year’s tax liability. By choosing this option you will simply divide the total amount of tax you paid in 2008 by 4. There is an exception to this rule if your 2008 income was $150,000 or greater. Rather than being able to base estimated payments on 100% of last year’s total tax, higher income taxpayers are required to base payments upon 110% of last year’s total tax.
Review your income tax plan regularly
Staying current with estimated tax payments requires a plan. Review your actual income and tax payments on a regular basis if you are subject to estimated taxes. This is especially important if you anticipate significant fluctuations in your income. A little planning can avoid significant headaches and surprises when the next tax filing deadline arrives. In my professional experience I have seen many tax problems arise as a result of the lack of planning.
Avoid estimated tax penalties
A penalty may be applied if you do not pay enough estimated tax for the year. Estimated tax penalties may also apply if you do not make payments on time or in the correct amount. The Internal Revenue Service recently announced that interest rates for the calendar quarter beginning July 1, 2009, would remain the same. The rate for underpayment of taxes is currently 4 percent. The best way to avoid estimated tax penalties is to consistently track income and tax payments throughout the year. While this rate is currently rather low, any penalties that can be avoided will put more money in your pocket and eliminate unnecessary penalty payments to the IRS.
Plan ahead for events that may result in an estimated tax
Be prepared if you have an unexpected event occur (e.g., loss of job, divorce, early retirement, family emergency, major purchase) that requires a taxable distribution from a retirement plan or other investments that are subject to taxes. Taxpayers are frequently overwhelmed with dual focus on meeting cash flow needs and satisfying tax obligations. During uncertain economic times or when faced with a cash flow crisis, it can be very tempting to ignore basic tax obligations. Proper income tax planning can help prevent problems during both good times and bad financial times. Any potential tax event should be discussed with your tax advisor or financial planner.
Stay current with your payments
Estimated taxes are due by the 15th of April, June, September, and January. It is important to keep in mind that these are not exactly “quarterly payments”.
If needed, try making weekly, bi-weekly, or monthly payments. This will reduce the impact of the sticker shock related to quarterly payments throughout the year. A significant amount of discipline is required to make sure that funds set aside for estimated tax payments are actually available when needed. If you are routinely struggling to identify funds for estimated tax payments you should strongly consider establishing a separate bank account (e.g., checking, savings, money market) specifically for estimated taxes. Never commingle funds designated for taxes with monies that are being used to meet basic living expenses.
Use the Electronic Federal Tax Payment System
Paying taxes electronically can eliminate the need to write checks and streamline the process of paying estimated taxes. Using the EFTPS system is the easiest way to pay federal taxes for individuals as well as businesses. Taxpayers have the ability to make all federal tax payments including federal tax deposits, installment agreement and estimated tax payments using Electronic Federal Tax Payment System (EFTPS).
Calculate your estimated tax payments
Many taxpayers have difficulty predicting what their actual income from self-employment and other sources (rental properties, investments, etc.) will be from year to year. Form 1040-ES is the form that is used to calculate required estimated tax payments. Use this form to calculate estimated taxes. Unless you anticipate significant changes in income, it is generally a good idea to make estimated tax payments based on 100% of the previous year’s tax liability. By choosing this option you will simply divide the total amount of tax you paid in 2008 by 4. There is an exception to this rule if your 2008 income was $150,000 or greater. Rather than being able to base estimated payments on 100% of last year’s total tax, higher income taxpayers are required to base payments upon 110% of last year’s total tax.
Review your income tax plan regularly
Staying current with estimated tax payments requires a plan. Review your actual income and tax payments on a regular basis if you are subject to estimated taxes. This is especially important if you anticipate significant fluctuations in your income. A little planning can avoid significant headaches and surprises when the next tax filing deadline arrives. In my professional experience I have seen many tax problems arise as a result of the lack of planning.
Avoid estimated tax penalties
A penalty may be applied if you do not pay enough estimated tax for the year. Estimated tax penalties may also apply if you do not make payments on time or in the correct amount. The Internal Revenue Service recently announced that interest rates for the calendar quarter beginning July 1, 2009, would remain the same. The rate for underpayment of taxes is currently 4 percent. The best way to avoid estimated tax penalties is to consistently track income and tax payments throughout the year. While this rate is currently rather low, any penalties that can be avoided will put more money in your pocket and eliminate unnecessary penalty payments to the IRS.
Plan ahead for events that may result in an estimated tax
Be prepared if you have an unexpected event occur (e.g., loss of job, divorce, early retirement, family emergency, major purchase) that requires a taxable distribution from a retirement plan or other investments that are subject to taxes. Taxpayers are frequently overwhelmed with dual focus on meeting cash flow needs and satisfying tax obligations. During uncertain economic times or when faced with a cash flow crisis, it can be very tempting to ignore basic tax obligations. Proper income tax planning can help prevent problems during both good times and bad financial times. Any potential tax event should be discussed with your tax advisor or financial planner.
Stay current with your payments
Estimated taxes are due by the 15th of April, June, September, and January. It is important to keep in mind that these are not exactly “quarterly payments”.
If needed, try making weekly, bi-weekly, or monthly payments. This will reduce the impact of the sticker shock related to quarterly payments throughout the year. A significant amount of discipline is required to make sure that funds set aside for estimated tax payments are actually available when needed. If you are routinely struggling to identify funds for estimated tax payments you should strongly consider establishing a separate bank account (e.g., checking, savings, money market) specifically for estimated taxes. Never commingle funds designated for taxes with monies that are being used to meet basic living expenses.
Use the Electronic Federal Tax Payment System
Paying taxes electronically can eliminate the need to write checks and streamline the process of paying estimated taxes. Using the EFTPS system is the easiest way to pay federal taxes for individuals as well as businesses. Taxpayers have the ability to make all federal tax payments including federal tax deposits, installment agreement and estimated tax payments using Electronic Federal Tax Payment System (EFTPS).
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