Can’t pay your tax liability for 2016? We have the information you need to know:
First, do not let your inability to pay your tax liability in full keep you from filing your tax return on time. If your return is not on time, you must still pay the “failure to file” penalty, which accrues at a rate of 5% per month on the amount of tax that you owe based on your return.
If in doubt, you can delay the “failure to file” penalty for six months by filing an extension, but this still won’t keep you penalty free.
Although an extension provides you with more time to file your actual return, it is not an extension of your payment date. If you do not pay the balance of your 2016 tax liability, you will be subject to the “failure to pay” penalty. This penalty accrues at the rate of 0.5% per month or partial month (up to a maximum of 25%) on the amount that you owe based on your return.
If both penalties apply, the “failure to file” penalty drops to 4.5% per month or part thereof, so the total combined penalty remains 5%. The maximum combined penalty for the first five months is thus 25%. Thereafter, the “failure to pay” penalty will continue to increase at 1/2% per month for 45 more months (up to an additional 22.5%). Thus, the combined penalties can reach a total of 47.5% over time. Both of these penalties are in addition to the interest charges on the late payments.
The bottom line is that, if you owe money, it is best to file your return on time even if you can’t pay the entire liability. That will minimize your penalties. Paying as much as you can with your return will further minimizing your penalties. By the way, neither the penalties nor the interest are tax-deductible.
Possible Solutions – The following are possible ways to pay your tax liability when you don’t have the funds readily available:
- Relatives and Friends – Borrowing money from family members or close friends is often the simplest method to pay a tax bill. One advantage of such loans is that the interest rate will probably be low; however, you must also consider that loans of more than $10,000 at below-market interest rates may trigger tax consequences. Any interest paid on this type of loan would be nondeductible.
- Home-Equity Loans – A home-equity loan is another potential source of funds; such a loan has the advantage that the interest is deductible as long as the total equity loans on the home don’t exceed $100,000. However, in today’s financial environment, qualifying for these loans may be too time-consuming.
- Credit or Debit Cards – Using your credit card to pay your taxes is another option. The IRS has approved three firms to provide this service. The disadvantages are that the interest rates are relatively high and that you must pay the merchant fee (because the IRS does not). For information about this fee and about making payments by credit card, visit the IRS website.
- Installment Agreements – You can request an installment arrangement with the IRS. You must be up-to-date when filing your returns. There are also fees associated with setting up an installment agreement, and if you do not follow some strict payment rules, the agreement can be terminated. If your liability is under $50,000 and you can pay off the full liability within 6 years, you will not be required to submit financial statements, and you can apply online. When applying online, you’ll get an immediate acceptance or rejection of your payment plan.
The fee for establishing such an agreement can be as high as $225, but it can be as low as $31 if you set up an online payment agreement and pay using direct debit from your bank account. You will also be charged interest, but the late-payment penalty will be half of the usual rate (1/4% instead of 1/2%) if you file your return by the due date (including extensions).
If any of the following occur, the installment agreement may terminate, causing all of your taxes to become due immediately: the information you provided to the IRS in applying for the agreement proves inaccurate or incomplete; you miss an installment; you fail to pay another tax liability when it is due; the IRS believes that its collection of the tax involved is in jeopardy; or you fail to provide an update regarding your financial condition when the IRS makes a reasonable request for you to do so.
- Pension Plans – Tapping into one’s pension plan or IRA should be a very last resort, not only because it degrades your future retirement but also because of the potential tax implications. Generally, except for Roth IRAs, the funds in retirement accounts are pretax; as a result, when withdrawn, they become taxable. If you are under 59½, any such distribution will also be subject to the 10% early-withdrawal penalty. Federal tax, state tax (if applicable), and this penalty can chew up a hefty amount of the distribution, which may be too high a price to pay.
A Final Word of Caution – Ignoring your filing obligation only makes matters worse, and doing so can become very expensive. It can lead to the IRS collection process, which can include attachments, liens or even the seizure and sale of your property. In many cases, these tax nightmares can be avoided by taking advantage of the solutions discussed above. If you cannot pay your taxes, please call Dagley & Co. to discuss your options.
“Do I have to file a tax return?” is a question heard a lot during this time of year. The answer to this popular question is a lot more complicated than many would think. To understand, one must realize the difference between being required to file a tax return vs. the benefit of filing a tax return even when it’s not required to file. We’ve put together a comprehensive description for your better understating:
When individuals are required to file-
- Generally, individuals are required to file a return if their income exceeds their filing threshold, as shown in the table below. The filing thresholds are the sum of the standard deduction for individual(s) and the personal exemption for the taxpayer and spouse (if any).
- Taxpayers are required to file if they have net self-employment income in excess of $400, since they are required to file self-employment taxes (the equivalent to payroll taxes for an employee) when their net self-employment income exceeds $400.
- Taxpayers are also required to file when they are required to repay a credit or benefit. For example, if a taxpayer acquired health insurance through a government marketplace and received advanced premium tax credit (APTC) they are required to file a return whether or not they are otherwise required to file. A return is required in order to reconcile the APTC with the premium tax credit they entitled based upon their household income for the year. So generally if you receive a 1095-A you are required to file.
- Filing is also required when a taxpayer owes a penalty, even though the taxpayer’s income is below the filing threshold. This can occur, for example, when a taxpayer has an IRA 6% early withdrawal penalty or the 50% penalty for not taking a required IRA distribution.
2016 – Filing Thresholds
Filing Status Age Threshold
Single Under Age 65 $10,350
Age 65 or Older 11,900
Married Filing Jointly Both Spouses Under 65 $20,700
One Spouse 65 or Older 21,950
Both Spouses 65 or Older 23,200
Married Filing Separate Any Age 4,050
Head of Household Under 65 $13,350
65 or Older 14,900
Qualifying Widow(er) Under 65 $16,650
with Dependent Child 65 or Older 17,900
When it is beneficial for individuals to file-
There are a number of benefits available when filing a tax return that can produce refunds even for a taxpayer who is not required to file:
- Withholding refund – A substantial number of taxpayers fail to file their return even when the tax they owe is less than their prepayments, such as payroll withholding, estimates, or a prior over-payment. The only way to recover the excess is to file a return.
- Earned Income Tax Credit (EITC) – If you worked and did not make a lot of money, you may qualify for the EITC. The EITC is a refundable tax credit, which means you could qualify for a tax refund. The refund could be as high as several thousand dollars even when you are not required to file.
- Additional Child Tax Credit – This refundable credit may be available to you if you have at least one qualifying child.
- American Opportunity Credit – The maximum for this credit for college tuition paid per student is $2,500, and the first four years of post-secondary education qualify. Up to 40% of the credit is refundable when you have no tax liability, even if you are not required to file.
- Premium Tax Credit – Lower-income families are entitled to a refundable tax credit to supplement the cost of health insurance purchased through a government Marketplace. To the extent the credit is greater than the supplement provided by the Marketplace, it is refundable even if there is no other reason to file.
For more information about filing requirements and your eligibility to receive tax credits, please contact Dagley & Co. for more information. We recommend not procrastinating, no matter what your stance on filing may be!
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August is here, which means there are due dates you need to know about. We have both individual and business due dates in the following:
August 2016 Individual Due Dates
August 10 – Report Tips to Employer
If you are an employee who works for tips and received more than $20 in tips during July, you are required to report them to your employer on IRS Form 4070 no later than August 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.
August 2016 Business Due Dates
August 1 – Self-Employed Individuals with Pension Plans
If you have a pension or profit-sharing plan, this is the final due date for filing Form 5500 or 5500-EZ for calendar year 2015.
August 1 – Social Security, Medicare and Withheld Income Tax
File Form 941 for the second quarter of 2016. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until August 10 to file the return.
August 1 – Certain Small Employers
Deposit any undeposited tax if your tax liability is $2,500 or more for 2016 but less than $2,500 for the second quarter.
August 1 – Federal Unemployment Tax
Deposit the tax owed through June if more than $500.
August 1 – All Employers
If you maintain an employee benefit plan, such as a pension, profit-sharing, or stock bonus plan, file Form 5500 or 5500-EZ for calendar year 2015. If you use a fiscal year as your plan year, file the form by the last day of the seventh month after the plan year-ends.
August 10 – Social Security, Medicare and Withheld Income Tax
File Form 941 for the second quarter of 2016. This due date applies only if you deposited the tax for the quarter in full and on time.
August 15 – Social Security, Medicare and Withheld Income Tax
If the monthly deposit rule applies, deposit the tax for payments in July.
August 15 – Non-Payroll Withholding
If the monthly deposit rule applies, deposit the tax for payments in July.
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An account of everything an individual owned or had interest in on the date of their death is included in the tax on the transfer of their property. This is called the estate tax. This includes cash and securities, real estate, insurance, trusts, annuities, business interests, and other assets. The tax is based on the fair market value of these assets (less certain exclusions), generally as of the day the decedent died.
An inflation-adjusted lifetime exclusion prevents smaller estates from being taxed. This exclusion is $5,450,000 for 2016, but it is adjusted (reduced) by the value of untaxed gifts that the decedent gave in excess of the annual gift exemption (currently $14,000) over his or her lifetime. Thus, if the value of all the decedent’s property is less than the adjusted exclusion amount, there would be no estate tax and, generally, no need to file an estate tax return. However, filing an estate tax return when it otherwise wouldn’t be needed may be beneficial to the surviving spouse when the decedent was married.
When a decedent is survived by a spouse and the decedent’s estate is worth less than the adjusted lifetime exclusion, the estate of the decedent may elect to pass any of the decedent’s unused lifetime exclusion to the surviving spouse. Considering that estate tax rates currently range from 18 to 40 percent, this can be very beneficial if the estate of the surviving spouse could exceed the adjusted lifetime exclusion when he or she subsequently passes.
Example – A husband with an estate valued at $2 million died in 2014, having made prior taxable gifts of $1 million. Even though there was no estate tax return filing requirement, the decedent’s spouse filed one to claim the election to pass the decedent’s unused lifetime exclusion to his spouse. The husband’s unused exclusion amount was $2.34 million, which is the 2014 estate tax exemption of $5.34 million minus the $1 million in prior taxable gifts and the $2 million value of his estate. His spouse can then add his unused exclusion to her own. Assuming that the spouse has made no taxable gifts, if she passes in 2016, her estate’s exclusion amount for 2016 would be $7.79 million (her $5.45 million basic exclusion amount plus $2.34 million of her spouse’s unused exclusion amount).
For the surviving spouse (or his or her estate) to claim the deceased spouse’s unused exclusion amount, the estate of the first spouse to die must make an election, referred to as the portability election, by filing a timely estate tax return. The estate tax return must include a computation of the unused exclusion amount. This is true even if the value of the estate is not enough to require an estate tax return to be filed.
This presents a quandary for the executor (or other representative of the estate, often the surviving spouse), who must decide whether it is worth the cost of having an estate tax return prepared and filed when there is no requirement to do so outside of making the portability election (as estate tax returns are quite complicated and expensive).
When making this decision, an executor needs to carefully consider the likelihood of the surviving spouse’s estate exceeding the adjusted lifetime exclusion amount. Another factor to consider is that Congress has changed both the lifetime exclusion amount and the estate tax rates in the past; as this topic seems to be a constant subject of discussion in Washington, there are no guarantees that the exemption will remain at its current level. If the executor is not the surviving spouse, he or she will ideally consult with the widow(er) on the decision, but this is not required. This could pose a problem if there is animosity between the executor and the surviving spouse. To avoid this situation, if someone other than the spouse is the executor of the estate for the first spouse to die, it is a good idea to include language in the couple’s wills or trusts that will require the executor to make the portability election.
If you have questions related to this election, the lifetime exclusion, the annual gift tax exemption, or estate planning in general, please give Dagley & Co. a call.
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It is not too late if you overlooked an item of income or forgot to claim a deduction or credit on your already filed tax return. An amended return can be filed to correct an already filed tax return. Failing to report an item of income will most certainly generate an IRS inquiry, which typically happens a year or more after the original return was filed and after the interest and penalties have built up. Therefore, it is best to file an amended return as soon as possible to avoid the headache of IRS correspondence and to minimize the interest and penalties on any additional tax you might owe.
On the flip side, if you overlooked a significant deduction or tax credit and you have a refund coming, you certainly don’t want that to go by the wayside.
The solution is to file an amended return as soon as the error or omission is discovered. Amended returns can also be used to claim an overlooked credit, correct the filing status or the number of dependents, report an omitted investment transaction, submit information from delayed K-1s, or anything else that should have been reported on the original return.
If the overlooked item will result in a tax increase, penalties and interest can be mitigated by filing an amended return as soon as possible. Procrastination leads to further complications once the IRS determines something is missing, so it is best to take care of the issue right away.
Generally, to claim a refund, an amended return must be filed within three years from the date the original return was filed or within two years from the date the tax was paid, whichever is later.
If any of the above applies to your situation, please give Dagley & Co. a call so we can prepare an amended tax return for you.
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The question many taxpayers ask during this time of the year is, “Must I file a tax return?” or “Should I file a tax return? These questions are far more complicated than people believe. To fully understand, we need to consider that there are times when individuals are REQUIRED to file a tax return, and then there are times when it is to individuals’ BENEFIT to file a return even if they are not required to file.
When individuals are required to file:
Generally, individuals are required to file a return if their income exceeds their filing threshold, as shown in the table below. The filing thresholds are the sum of the standard deduction for individual(s) and the personal exemption for the taxpayer and spouse (if any).
Taxpayers are required to file if they have net self-employment income in excess of $400, since they are required to pay self-employment taxes (the equivalent to payroll taxes for an employee) when their net self-employment income exceeds $400.
Taxpayers must also file when they are required to repay a credit or benefit. For example, taxpayers who underestimated their income when signing up for health insurance on a government health insurance marketplace and received a higher advance premium tax credit than they were entitled to are required to repay part of it.
Filing is also required when a taxpayer owes a penalty, even though the taxpayer’s income is below the filing threshold. This can occur, for example, when a taxpayer has an IRA 10% early withdrawal penalty or the 50% penalty for not taking a required IRA distribution.
2015 – Filing Thresholds
Filing Status Age Threshold
Single Under Age 65 $10,300
Age 65 or Older 11,850
Married Filing Jointly Both Spouses Under 65 $20,600
One Spouse 65 or Older 21,850
Both Spouses 65 or Older 23,100
Married Filing Separate Any Age 4,000
Head of Household Under 65 $13,250
65 or Older $14,800
Qualifying Widow(er) Under 65 $16,600
with Dependent Child 65 or Older $17,850
Consequences of Not Filing – If you have been procrastinating about filing your 2015 tax return or have other prior year returns that have not been filed, you should consider the consequences if you are REQUIRED file. The April 18 due date for the 2015 returns is just around the corner.
Failing to file a return or filing late can be costly. If taxes are owed, a delay in filing may result in penalty and interest charges that could substantially increase your tax bill. The late filing and payment penalties are a combined 5% per month (25% maximum) of the balance due.
April 18, 2016 is also the last day to file a 2012 return and be able to claim any refund you are entitled to.
Even if you expect to have a tax liability and cannot pay all the tax due, you should file your tax return by the due date to minimize penalties.
When it is beneficial for individuals to file – There are a number of benefits available when filing a tax return that can produce refunds even for a taxpayer who is not required to file:
Withholding refund – A substantial number of taxpayers fail to file their returns even when the tax they owe is less than their prepayments, such as payroll withholding, estimates, or a prior overpayment. The only way to recover the excess is to file a return.
Earned Income Tax Credit (EITC) – If you worked and did not make a lot of money, you may qualify for the EITC. The EITC is a refundable tax credit, which means you could qualify for a tax refund. The refund could be as high as several thousand dollars even when you are not required to file.
Additional Child Tax Credit – This refundable credit may be available to you if you have at least one qualifying child.
American Opportunity Credit – The maximum credit per student is $2,500, and the first four years of postsecondary education qualify. Up to 40% of that credit is refundable when you have no tax liability and are not required to file.
Premium Tax Credit – Lower-income families are entitled to a refundable tax credit to supplement the cost of health insurance purchased through a government health insurance marketplace. To the extent the credit is greater than the supplement provided by the marketplace, it is refundable even if there is no other reason to file.
DON’T PROCRASTINATE! There is a three-year statute of limitations on refunds, and after it runs out, any refund due is forfeited. The statute is three years from the due date of the tax return. So the refund period expires for 2015 returns, which are due in April of 2016, on April 15, 2019.
For more information about filing requirements and your eligibility to receive tax credits, please contact Dagley & Co.
Do you know which due dates are approaching you as an employer? Beginning in 2015, Applicable Large Employers are required to file a new informational return – 1095-C, Employer-Provided Health Insurance Offer and Coverage. One of these informational returns must be provided to each full-time employee and filed with the IRS, along with a Form 1094-C transmittal form, by the due dates listed below.
An Applicable Large Employer is an employer with 50 or more full-time employees, including full-time equivalent employees. Applicable Large Employers are required to report information to full-time employees and the IRS about the coverage they offered or did not offer to their full-time employees. It is important to understand that Applicable Large Employers are required to file the 1094-C and 1095-C forms Regardless of whether or not they offered their full-time employees insurance, even if they were exempt from the insurance mandate for 2015 because they employed fewer than 100 full-time and full-time equivalent employees.
The purpose of the new form is twofold: (1) to provide the IRS with information it needs to determine if the employee is eligible for the Premium Tax Credit and (2) to provide the IRS information it needs to determine the employer’s health coverage excise tax (the penalty for not offering affordable care to its full-time employees), if any.
All employers need to complete parts I and II of the 1095-C for each full-time employee. Self-insured employers must also complete part III, which is the information that would be included on a Form 1095-B issued to the employer’s employees by group health insurance companies when the employer is not self-insured.
Due Dates: The Form 1095-C to employees is due by March 31. For the 1095-C and 1094-C filed with the IRS, the paper is to be filed by May 31 and E-filed by June 30. Note: If the employer files 250 or more 1095-Cs, the forms must be electronically filed.
If you need additional information related to this filing requirement or assistance with filing these forms, please contact Dagley & Co. as soon as possible as the due date is drawing close.
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