Month: November 2016

Tips When You Cant Pay Your Taxes

Not paying your taxes on time entails various consequences. If you are having trouble paying your taxes in full, don’t let it hinder you in filing your tax return timely. Consider paying as large a percentage of the amount owed or borrow money from others in order to settle your tax liability in full. Filing a return and not including full payment can save you large amounts of penalties and fees. Moreover, payment plans are available and being on a current payment plans avoids IRS collection process which may include, property seizures, garnishments etc. Most CPA firms can advise you on these matters.

These are the ordinary penalties:

· “Filing Failure” penalty

5% per month on the amount of tax due on the return to a maximum of 25%

· “Payment Failure” penalty

.5% per month on the amount of your tax due on the return to a maximum of 25%

· Both “Filing Failure” penalty and “Payment Failure” penalty apply

The “Filing Failure” penalty lowers to 4.5% per month and “Payment Failure” penalty is

.5% per month. The combined penalty stays at 5%. The maximum penalty for both is 25%. Then, the “Payment Failure” penalty continues at.5% per month another 45 more months. Both penalties can go to a maximum of 47.5%.

Besides the penalties above, interest is charged on late payments. Also when you are self-employed, you take full responsibility for paying the taxes as money is earned through the year.

Payment extensions are provided when it can be proven that unwarranted hardship exists. Inconvenience caused by paying the tax isn’t enough grounds for unwarranted hardship. The taxpayer must show that paying the tax would cause significant difficulty and/or expense. For example, a fire sale, selling property at an extremely discounted price, since the person faces the difficulty of paying taxes.

When a payment extension is granted, interest is still charged but the “Payment Failure” penalty is waived. The payment extension is usually good for six months from the due date of the return. The IRS will lengthen time allowed for a payment extension due to some circumstances..

To apply for a payment extension use Form 1127. Form 1127 requires a taxpayer to provide detailed statements of; assets and liabilities, statement income for each of the 3 months prior to the due date of the tax return and statement expenses for each of the 3 months prior to the due date of the tax return.

Paying Income Taxes With Borrowed Funds

Borrowing money to settle tax obligations is an option. Here are some various scenarios:

· Loan From Individuals

Borrow from relatives or friends. Interest rates are probably lower.

· Loans From Banks Or Other Commercial Institutions

Interest on this type of loan is usually considered a non-deductible personal interest expense. Typically a financially troubled taxpayer has a hard time to qualify for this type of loan.

· Home Equity Loan

Interest rates may be lower than with other types of loans. The interest payments may be tax-deductible. This is usually the cheapest option.

· Credit Card

There are a number of companies approved to accept credit cards or debit cards to pay income tax. Note, interest charges may be high and is usually considered a non-deductible personal interest expense. On top of this interest, the companies approved to accept credit cards or debit cards to pay income tax charge a service fee.

Monthly Payment Agreement Request

File form 9465 to apply for a monthly payment agreement with IRS, this can be done online at WWW.IRS.GOV. This process can be done after a hardship extension expires. Form 9465 requires less information than Form 1127 regarding the hardship extension. No financial statements are required if tax due is under $50,000.

When the amount owed is more than $50,000 Form 433-A Collection Information Statement for Wage Earners and Self-Employed Individuals is required. This form helps the IRS obtain detailed, information about you. Consider consulting a CPA Firm about allowable expenses and national living standards that correspond to Form 433-A.

There is a fee for the monthly payment agreement and it is deducted from the first payment if the request is approved. When the payment agreement request is approved, interest on any tax due date is still imposed. However the “Payment Failure” penalty is reduced to.25 % instead of.5% if the return is timely filed.

The monthly payment agreement has a fee of $120. The fee is reduced to $52 when a person permits the IRS auto debit from their account. In the event the taxpayer qualifies as a low-income the fee is reduced to $43.

Monthly Payment Agreements may be terminated if IRS thinks the probability of obtaining payments are at risk. The IRS will also terminate a monthly payment agreement if the financial information supplied was not accurate or complete.

Other reasons for terminating the agreement are the following:

• Failing to make a monthly payment.

• Failing to pay another tax liability when it’s due.

• Failing to provide updated financial information.

• IRS finds out that your financial condition has improved.

A written notice will be sent by the IRS 30 days prior to changing or terminating a monthly payment agreement. IRS will also provide the grounds for changing or terminating a monthly payment agreement. The requirement for written notice does not apply when the IRS believes the collection of tax owed is at risk.

Thus, it is very important that tax returns are filed properly even if full payment cannot be made. Options like hardships extensions or monthly payment agreements may be availed to prevent further charges, penalties and other serious consequences.

We hope this article was helpful. This article is an example for purposes of illustration only and is intended as a general resource, not a recommendation.

Tips To Calculate Federal Payroll Taxes

Calculating federal payroll taxes is easy once you understand a few concepts that are fundamental to the earnings you receive regardless of whether you’re salaried, paid by the hour, or a contractor who has chosen to have deductions applied. This article breaks down how the federal payroll taxes seen on employee pay stubs are calculated.

How Federal Taxes Affect Different Types of Employees

When calculating your taxes, the type of employee you are – salaried, hourly, or contractor, isn’t nearly as relevant as the amount of income you generate. The exception, of course, is that contractors and other individuals who typically don’t have taxes retained, will have a value of zero for the federal tax withheld unless they specifically request otherwise.

Federal income deductions are levied among citizens based on the amount they generate annually. The lower the income, the smaller the tax rate that is applied. As of 2016, anyone with an annual income over $2,250 must have federal taxes deducted from their income. Salaried employees, those who generate a set earning amount annually, will have a set amount deducted in federal taxes each pay period. Hourly employees, however, will have a federal tax rate that is projected based on the amount of earnings they have generated in their previous pay periods. As the year progresses, employers are better able to gauge the total amount they anticipate the employee will make based on their pay frequency and the number of hours they typically work during a pay period.

How Pre and Post Amounts Affect Deductions

Pre and post deductions are additional factors that change the amount of federal taxes that are withheld. As stated before, federal deductions are based on the amount of gross income earned. The more you earned, the more you pay in taxes. With pre-tax deduction amounts, you subtract the pre-tax amount from your gross income before the federal tax rate is applied. The end result is that you pay federal taxes on a lower amount and hence, you don’t pay as much. Pre-tax amounts traditionally include some retirement savings plans, health related deductions like dental, and college savings plans to name a few. Post-tax deductions are the remaining gross amount that taxes are applied to once all of the pre-tax amounts have been subtracted.

What is the Federal Insurance Contributions Act (FICA)?

Other federal deductions that are paid by salaried and hourly employees at every level include FICA, the Federal Insurance Contributions Act, which appears on each pay stub as two distinct entries. The first entry represents the social security tax and the second entry is the Medicare tax, sometimes referred to as OASDI. Both taxes are applied at a flat percentage rate with Social Security at 6.2% and the Medicare tax at 1.45%. Whereas a cap exists on the amount of social security that can be withdrawn, no such limit is present for the medicare tax. The more you earn, the more you pay.

Understanding how to calculate your federal taxes is easy once you:

1. Identify the gross income amount

2. Distinguish between pre and post deductions that are being removed from your earnings.

3. Subtract the pre-tax amounts from your gross income.

4. Apply the federal tax rate, Medicare tax, and the Social Security tax to the gross income earned.

All About Tax Liability

Every year many tax payers have no idea whether they will owe taxes or not. Often, some tax payers feel that they may owe, but have no idea how much or why? Understanding how to determine your tax liability will not only help you make better decisions about the way you treat income, but it will go a long way to ease the stress that is often experienced when it’s time to file your tax return.

Obviously, the first variable in the tax formula is gross income. This is the aggregate of all earned and unearned income from various sources throughout the year. Income is either earned or unearned. Earned income is cash or in-kind benefits people receive in exchange for work or service, including employment and self-employment. Unearned income is cash or in-kind benefits that people receive without being required to perform work or service. Depending on the type of income you receive, as well as other variables your tax outcome could vary.

Next, certain deductions are subtracted from gross income. These deductions are referred to as above the line deductions, and are used to arrive at adjusted gross income or AGI. The name comes from their paperwork placement. They are found on page one of Form 1040, just above the line where adjusted gross income is tabulated. They include contributions to traditional IRA, alimony, moving expenses, and many others. For a complete list of “above the line” deductions please see 17.

After you arrive at AGI, there’s another round of deductions known as personal and dependency exemptions. The personal exemption amount in 2016 is $4,050.00 dollars. The IRS allows every resident tax payer to deduct this amount from personal income. Dependency exemptions are personal exemptions allowed for tax payers who have qualified dependents. For example, if a tax payer filed married filing jointly, and they have 2 children; the number of personal exemptions would be 4. Please see IRC section 152 for additional information.

There two types of additional deductions. One is called standard deduction, or tax payers may itemize deductions. Generally, a comparison is done to derive at which deduction type is most advantageous. The standard deduction is a pre-determined amount based on filing status. The standard deductions for year ending December 31, 2016 is the following:

Single – $6,300.00
Married Filing Jointly – $12,600.00 Married Filing Separate – $6,300.00
Head of Household – $9,300.00
Qualifying Surviving Spouse – $12,600.00

At this point, both personal exemptions and either standard or itemized deductions are subtracted from AGI to arrive at taxable income. To determine your tax rate, examine applicable tax tables at

Please be mindful of additional deductions (credits, prepayments toward tax, overpayments or credits from previous years, and tax withheld by an employer or previously made estimated tax payments) that are subtracted from your tax liability to determine net tax payable.

How To Investing Mutual Funds on Tax

There are some tax downfalls linked with trading mutual funds that should be given consideration. Awareness of these downfalls will reduce taxes and stop surprises from happening while visiting your CPA firm.

One thing to be aware of is, that it is possible to sell a mutual fund unknowingly or what one client called a “Stunner” sale. This may arise if your mutual fund has an option to issue checks out of your investment in the fund. Whenever checks are deducted from the investment, a partial sale of the investment is being executed. A taxable gain or deductible loss arises from each check written, with the exception of funds that have shares that are always one dollar values (e.g. money markets). Furthermore, each sale needs to be listed on the annual income tax return as a line item.

Some clients are also surprised when taxable sales results from rebalancing the portfolio of fund investments. Most mutual funds allow investors make modifications and allocate the way the account is invested. Rebalancing and reviewing an investment portfolio is a basic principle of money management. The rebalancing and transferring of money from one mutual fund to another mutual fund is a taxable sale of the mutual fund that was transferred.

Maintaining records is also important. Investors should save all the official tax receipts and correspondence such as Form 1099-DIV, statements and trade confirmations. The statements are helpful when the time comes to calculate the costs of investments that have been sold. Most fund companies allow investors to reinvest their dividends to purchase additional shares or fractional shares when the dividend is paid. These documents are necessary to calculate the amount of taxable gain or deductible loss when the investment is sold. This paperwork has extra valuable during an IRS audit. Some clients receive statements at the end of the year with comprehensive lists of all the transactions for the year, we usually recommend keeping the annual statements and discarding the other accounts statements received during the year. Always save the envelopes that say “tax information inside.”

In 2011 record keeping requirements were cut down and streamlined. New rules make it necessary for mutual fund companies to track all gains or losses on investments sold by the company and to provide this information to investors. The company must also report whether the gains and losses are short or long- term.

For the investments purchased before 2011, the mutual fund companies usually give investors all the information they have available to facilitate calculating any gain or loss on the sale of the fund.

Timing is another concept to consider. Gains distributions can be a bad thing believe it or not. As a general rule, investors should avoid purchasing a fund close to the capital gain distribution or dividend date. The dividend is taxable and increases an investor’s tax liability. These payments increase the tax in spite of the fact; the money is being reinvested in new shares. On the other hand, an investor maybe considering selling a mutual fund near the end of the year, and should weigh out the tax and non-tax implications of the sale in the current year versus a sale in the succeeding year. The sale in succeeding year transfers the gain or loss to the next tax year.

Long term investors should also assess which shares of the same investment should be held and which should be sold. There are guidelines in identifying such shares and following the guidelines can reduce tax. One way reduce tax is to identify shares that have been held longer than one year and qualify for the more preferable long-term capital gain rate. Another way to save on taxes is loss harvesting, for example, suppose Karla owns 100 shares of Google. She bought 40 shares at $40 per share, 30 shares at $80 per share and the remaining 30 shares at $50 per share. Karla then sells 30 shares at $70 per share. Specifically identifying the shares, Karla can match the shares she sold with the 30 shares she purchased for $80 per share, generating a tax loss.

We hope this article was helpful. This article is an example for purposes of illustration only and is intended as a general resource, not a recommendation.