You filed your return and owe $5,000. Assuming you dont have the money, what are your options? Should you pay by credit card or make an agreement with IRS to pay in installments?
Tax payments by credit card have become popular. The Wall Street Journal recently reported nine instances where individuals owing taxes of more than $1million have paid with credit cards. The highest charge to date amounts to $9 million (that's 40 first-class upgrades!).
Use of a credit card could be expensive, considering the 1-3% fee, plus 14%-18% annual interest on the unpaid balance. In contrast, IRS penalties and interest will amount to approximately 7.5% on any unpaid balance. Further, IRS applies payments first to principal, then penalties and then interest (the opposite of a typical loan), thereby reducing the principal which, in turn, reduces the interest.
If you owe taxes, but cannot pay them by April 15, you are not required to use a credit card. If you filed and paid your taxes without an installment agreement during the previous 5 years, you are entitled to pay the balance in installments as long as your balance is under $10,000 by April 15th and the tax will be fully paid in 3 years. IRS will negotiate an installment agreements when the tax is greater than $10,000, provided the taxpayers does not have sufficient assets to pay the tax.
Use a credit card if: (1) You want to earn bonus points or mileage offered by your credit card, the service fee is low and you plan to pay the balance by the next statement; (2) you cannot qualify for an installment arrangement with IRS; (3) you want IRS off your back and out of your life.
Another, and more sinister, reason for using a credit card is that the liability to the credit card company is unsecured (thats probably why the interest rate is so high) and the company must take you to court to collect. IRS, on the other hand, may immediately garnish your paycheck or seize your bank account and other assets to satisfy your tax debt.
Here are six recommendations for lowing your tax bill next year.
1. Keep Good Records: This is rule number one. Place all your receipts in an expanding folded, divided by months, labeled "Tax Receipts 1999." Keep a pouch in your car, purse or briefcase to collect receipts. If youll claim travel expenses, maintain a diary in your car noting your travel (date, place and round-trip mileage). Also, keep a diary in your receipts folder to record cash expenditures without receipts. Write down the date, amount, place of purchase and items purchased.
2. Convert non-deductible interest payments into deductions by obtaining a home-equity loan and paying off your credit card and student loans, to the extent they are not otherwise deductible.
3. Encourage your Under-18 Children to Work. If your child receives reasonable compensation for services actually rendered (whether or not the child works for your company), he or she can earn $4,250 without incurring tax. Thereafter, the child will be in the 15% bracket. If your child earns more than $2,000, open a Roth IRA for him or her and make a gift of that amount. When needed, your child can withdraw up to $10,000 for the purchase of a first home, tax-free!
4. Deduct your Gambling Losses. You can deduct gambling losses (including Lotto ticket purchases) to the limit of your winnings, as an itemized deduction. Your records must include the date, location and wager amount, type of gambling and winnings or losses.
5. Job-Hunting Expenses. Hunting for a new job in your same line of work is deductible, even if you do not find a new job. These expenses include professional and employment agency fees, résumé and related costs, advertising, transportation to interviews, long-distance calls and travel away from home (meals, lodging and transportation).
6. Employ family members to save payroll taxes: Employing family members avoids payment of certain payroll taxes. Wages paid to under-18 children (under-21 for domestic work) arent subject to payroll taxes.
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**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**