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WORST
WAYS TO PAY YOUR TAXES
 Not
only is paying your taxes important, but paying them the correct
way is crucial. The IRS does have what it takes to take what
you’ve got, but you shouldn’t be in such a panic
to pay Uncle Sam, that you make an unwise decision.
Frantic
taxpayers often come up with imprudent ways to raise tax cash,
especially when the April deadline is looming, and the Internal
Revenue Service bill is relatively small. But even a small amount
can quickly balloon if exorbitant interest rates or other things
are attached.
Before you
make the make a tax payment mistake, check out these ten worst
ways to pay the IRS.
10. Get
a cash advance against your paycheck.
The Federal Trade Commission warms that the typical annual percentage
rate of interest on payday loans is 391 percent! This means
if you borrow $300 and fail to pay it back in two months worth
of paydays, you’ll owe $495. Some big spenders may think
they can afford it, but most of us cannot.
9. Get a
cash advance on your credit card.
Fees for cash advances vary, but most issuers charge you a 3
or 4 percent upfront fee (or a minimum of $20.00) plus an interest
rate of between 20 percent and 25 percent. According to Bankrate’s
minimum payment calculator, if you pay the least possible each
month on a $300 advance at 20 percent interest, it will take
you 42 months to be rid of your credit card debt. In that time,
you will pay just over $119 in interest, plus the $20 that you
paid up front for a total of $439. And that, of course, presumes
you don’t charge another dollar to that card. If you have
to resort to this, and you’ve been a good credit card
customer, you can try to ask for a lower interest rate.
8. Pawn
your diamond ring
You’ll probably have trouble getting as much as $300 for
anything short of the Hope diamond, but if you’re successful,
expect to pay for the privilege. Selling possessions to raise
quick cash is such a time-honored business that virtually every
state has similar and fairly tough regulations holding interest
to 3 percent a month or 36 percent a year, plus a 20-percent
upfront service charge. Twelve months is usually the maximum
length of a loan. So if you borrow $300, pay the up front fee
and the carrying charges every month for a year, it will cost
you $468 to get your ring back. If you don’t pay, kiss
your ring goodbye.
7. Take
out a personal loan.
The rates on unsecured personal loans can be ugly, but not as
ugly as some other fast-cash options. If you happen to have
a credit union available to you, try that first because the
rate is usually at least 2 percentage points lower.
6. Charge
your tax bill.
As the April deadline approaches, the pay-with-plastic option
begins to look like the answer. But you'll be charged a "convenience
fee" of about 2.5 percent based on the amount charged.
Don't be confused by the word convenience. It isn't for your
convenience. It's for the convenience of the credit card company
because the IRS won't cover the merchant fees. With an interest
rate of 15 percent and minimum monthly payments, Bankrate's
calculator figures it will take you 38 months to discharge a
$300 tax debt. Your total bill will come to a relatively modest
total of about $378, as long as you don't use the card again
until the tax balance is paid.
5. Use your
home equity.
If you have a home equity line of credit, it will allow you
to borrow against it usually by just writing a check. Interest
rates on equity accounts are attractive and if you pay what
you owe quickly, this debt will cost less than putting the same
amount on your credit card. But if interest rates head up, so
will equity line rates. And by using this payment method, your
home is the collateral for even the relatively small amount
you used to pay your tax bill.
4. Gamble
on the float.
It takes the government an average of five business days to
actually cash your check, sometimes longer in mid-April when
there are tractor-trailers full of forms in the parking lot
of every IRS processing center. If you get paid the day after
taxes are due, chances are the check you mailed April 15 won't
bounce. But be aware that you're still taking a chance. If your
check does bounce, the government considers it as nonpayment,
meaning you can expect to cough up a 0.5 percent per month penalty.
Plus, your bank is likely to charge you an insufficient funds
fee.
3. Dig into
your retirement account.
Many 401(k) and 403(b) employer-sponsored plans have provisions
that allow you to borrow your own money and pay it back to yourself
without penalty. The interest rate is usually low. You can't
borrow against your IRA, but you can withdraw the money and
use it for 60 days without penalty as long as you redeposit
it into the same or a new IRA account. If the money doesn't
find its way back into an IRA account within the 60-day period,
it will be subject to taxes and penalties. You can only use
this 60-day provision once a year. The clock starts ticking
on the date you receive the distribution. While it's easy to
temporarily withdraw some retirement money, most financial experts
advise against it unless it's an absolute last resort. Your
retirement nest egg should be a safe haven rather than an emergency
fund. Bankrate's 401(k) loan calculator can help you figure
the cost of raiding your retirement account.
2. Hit up
the folks.
Borrowing from relatives has one big drawback: It can ruin a
relationship. But if you only need the money for a short period
and dad (or mom or sis) can afford it, ask. And make it formal.
A note from you specifying the terms of repayment will make
you feel less like a 12-year-old begging for your allowance.
If dad says "no," accept the turndown graciously and
assume he has a good reason.
1. Pay off
the government monthly.
For an initial $43 set-up charge, the IRS will let you pay on
the installment plan if you file Form 9465, Installment Agreement
Request. The current interest rate is 7 percent annually, but
the IRS adjusts it quarterly so it will go up when the rest
of the rates head in that direction. And while the government
payment plan will cut your late payment penalties in half (to
one-quarter percent per month), on a $300 balance that saves
you less than 50 cents a month. Plus, you have to give the IRS
permission to attach your bank account if you fail to pay.
If Tax
time is upon you, but you haven’t had time to file a return,
you may file for an extension, but remember the extension only
applies to filing your return; your tax liability must be paid
in full by April 15th. If not, interest and penalties will accrue.
So that
you don’t have to worry about coming up with tax cash
next year, make sure your payroll withholding amount is correct
now. Through this process, wage earners have a percentage of
pay taken out each pay period and sent to the IRS where it is
credited toward the taxpayer’s final tax bill. If you
have too little taken out, you’ll owe money when you file
your annual return.
You can
adjust withholdings, or you can have an additional amounted
deducted on top of what is normally being withheld, simply by
filing a new W-4 with your payroll office. True, you’ll
have to deal with a slight cut in take-home pay, but you won’t
have to write a big check to Uncle Sam next April.
SAVE MONEY,
SOLVE PROBLEMS
Taxes take
a big bite out of most American’s budgets. In fact, they
are the largest single expense for many of us.
In addition,
many people probably pay more in taxes than they need to. A
study by the Government Accounting Office found that missed
deductions and credits resulted in more than 2 million Americans
overpaying their taxes by approximately $945 million in 2002,
an average overpayment of more than $400 per taxpayer.
Here at
our Company, we often hear questions and concerns from many
people about taxes. One of the topics we hear most frequently
is asking how they could save money.
Getting
organized and keeping good records are two of the keys to making
tax time less painful and expensive. You should start a file
and notebook where you can keep track of your income and expenses.
Some people do this on their personal computers, but be sure
to back it up each week. If you only receive income through
one job and your employer withholds taxes, this will be easier.
Still, it is a good idea to keep copies of your pay check stubs
in case any problems occur later on.
You should
always write down tax deductible expenses immediately, the same
day you incur them. Otherwise, you’re likely to quickly
forget about them. Keep records and receipts of any items you
may be able to deduct.
Many people
fail to take legitimate deductions because they are afraid it
will result in their being audited. In fact, your best defense
is to keep good records, check your returns carefully, and make
sure you get good advice about legitimate deductions. But overpaying
your taxes won’t protect you against an audit.
Here are
some commonly overlooked deductions:
CHARITY-
You may be able to deduct the value of items you give to charity,
cash donations, as well as mileage for time spent driving to
do volunteer work for a qualified charity. If you donate goods
to charity, ask for receipt. Expensive or large items should
be independently appraised to establish their value.
MOVING EXPENSES-
You should be able to deduct moving expenses if you moved at
least 50 miles from your old home, either for your current job
or a new one.
JOB EXPENSES-The
cost of education to maintain or improve skills in your current
profession may be deductible. Job-related expenses such as union
dues, uniforms, professional journals, dues paid to professional
associations, unreimbursed business expenses, a cell phone used
for work, and work tools may all be deductible.
INTEREST-
You generally can’t deduct credit card interest except
on a business credit card. But you usually can deduct interest
on a mortgage or home equity loan. Student loan interest is
also deductible. If you buy a home or refinance it, part or
all of your points may be deductible as well.
MEDICAL
EXPENSES- You can generally only deduct medical expenses that
exceed 7.5% of your adjusted gross income. But if you had significant
medical expenses, you may reach that amount faster than you
think. Don’t forget to include costs such as mileage spent
going to doctor appointments, therapy or to fill prescriptions;
treatments ordered by your doctor such as massages or those
for weight loss; dentures, crutches, canes, hearing aids, eyeglasses
or contact lenses; fees paid to a nursing home for medical care;
health insurance premiums paid out of taxed income (different
from the deduction available to those people who are self-employed).
You may also be able to deduct health insurance premiums if
you are self-employed.
CHILD CARE
EXPENSES- If you paid someone to care for a child or a dependent
so you could work, you may be able to reduce your federal income
tax by claiming the credit for the child and dependent care
expenses on your tax return, according to the IRS. This credit
is available to people who, in order to work or to look for
work, have to pay for childcare services for dependants under
the age of 13. The credit is also available if you paid for
care of a spouse or dependent of any age that is physically
or mentally incapable of self-care. For more details, visit
www.IRS.gov.
OTHER EXPENSES-
You may not have thought about deducting some of these expenses,
but they are worth checking out. They include gambling expenses
( can’t exceed winnings), tax preparation fees, safety
deposit fees if used for business or investment purposes, legal
fees paid to collect (taxable)alimony, worthless stocks or securities,
or alimony you paid.
There is
so much to know about taxes. Be sure you are aware or know someone
that can educate you about what you should or shouldn’t
do when it comes to getting your taxes in order. Creating a
workable budget and a repayment plan for your other debts may
free up enough money so that you can work out a payment plan
to get caught up on your taxes. The above are the opinions of
TCCF, but since we are not tax professionals, we strongly suggest
consulting a qualified tax expert before filing.
Everyone’s
tax situation is different, so it is in your best interest to
speak with someone who is familiar with Taxes and can give reliable
advice about your specific situation.
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