April is a tough month financially for most people. The Market Watch to-do and to-pay list is long, and we have to set payment priorities if there isn’t enough money to cover it all.
Most of our payments are due on April 15 this year. Folks in some states, like California, also have property tax payments due on April 10. So, that’s where the first dollars go this month.
In terms of income taxes and related costs, here’s your list of what’s due on April 15:
Payments to the IRS and your state
Income taxes : You are expected to pay your balance due for 2013 — even if you put your tax return on extension. You’ve heard the boring old litany from the IRS. “The extension is for additional time to file — not to pay.” We’ll talk more about this in a few moments to explain why this is not entirely true.
Estimated taxes: It’s time to start paying up for your 2014 profits and earnings. There is always a lot of confusion on how much needs to be paid, especially when your income is earned unevenly throughout the year. Figuring out what you owe requires you to get your bookkeeping done for each quarter. Or you need to have a solid idea of your investment income and/or business profits. Of course, you can often get away with simply paying one-quarter of last year’s liability to avoid the underpayment penalty. This doesn’t work when your income has increased substantially. In that case you’ll have to run the numbers to avoid the penalties.
Pay to financial institutions
IRA or Roth IRA contributions: Folks who want credit for contributions to individual retirement accounts for 2013 must finish funding your total contributions by April 15. You must also finish characterizing and re-characterizing your Roth contributions by this time. Don’t you just love the decisiveness of people playing the Roth IRA game? Folks writing to TaxMama engage in complicated dances moving the funds back and forth between IRAs and Roth IRAs multiple times during the year. Why not just wait until you know where your finances actually stand — and do this only once — after the year ends and before April 15?
What to consider before you switch advisory firms
Here’s what advisors need to consider before they can shops.
How do you prioritize your payments when you don’t have enough money to cover them all?
Step one: Fund your 2013 IRA. April 15 is the last instance in which you may fund the accounts for 2013. You can’t decide you want an IRA and fund it later. Besides, some people who fund their IRAs will also qualify for a Retirement Savers Credit — and get back up to $1,000 of their contribution ($2,000 married filing jointly).
Step two: Pay your current year estimated tax payments. Does this seem illogical? Do you think it makes more sense to pay as much as possible of last year’s taxes and stop the interest and penalties that are accruing? Well, that might make sense to you and me, but tax officials have a different point of view. Oddly enough, there is logic to that, too. Read the next step and you’ll get the explanation. But first, if you don’t have enough money to pay the full amount of the required estimated tax payment — pay as much of it as you can, leaving a hundred dollars or two for the next step.
Step three: Put your 2013 taxes on extension. Pay as much of last year’s taxes as you can afford to pay with the extension — even if it’s only $50 each to the IRS and state(s). (Yes, some people must pay several states.)
So, why are we only paying a small part of this with the money we have left? Because if you are going to need an installment agreement, neither the IRS nor the state will give you one if you are not “in compliance” for the current year. In other words, if you were bad last year, they’re not willing to help you out if you’re not showing a good-faith effort to be good this year. When you think about it, it does have a certain level of logic, doesn’t it?
What happens when you only pay a part of last year’s taxes and you still owe a big chunk? What can you do? First of all, the extension gives you six months to raise the money to pay 2013’s taxes. That’s a lot of time. You can get a second job, sell off securities if you have them, or borrow money.
Better yet, do what many new Internet millionaires do who don’t have the money to pay their taxes. Increase your business’s sales via the clever “tax sale” technique. You hold a special sale of your product or service (especially great if you have electronic products, like e-books or downloadable applications) just to raise money to pay the taxes. Explain to your customers that you are raising money to pay your taxes. You’d be surprised at their spirit of generosity and fun. They’ll help you out. You’ll raise the money you need; pay your 2013 taxes — and you’re all clear.
What if everything you do still brings you up short? Not a problem. As long as you’ve been keeping up your withholding and/or estimated tax payments for the year, you can ask the IRS and state for an installment agreement . In most cases (under $50,000 balance), the IRS will give it to you automatically, via an online application.
In the meantime, what is that balance due costing you? Not as much as you might think. The late payment penalty is only one-half of one percent per month (6% per year — up to a total of 25%). The interest rate on the balance due is only 3% per year. So, if you pay off the entire balance due no later than Oct. 15, your costs will only be 4.5% of the total balance due. Much less than loans or credit cards. If you pay via the installment agreement — the same interest and penalty rates apply.
With the extension, you won’t be charged the failure to file penalty, which is 5% per month, up to 25%.
Naturally, if at all possible, avoid owing the IRS and your state money. They have easy ways of tapping into your accounts when you miss payments. Lenders don’t have those tools. They just charge you late fees.
Once you’ve gotten all this out of the way by April 15, what should you do? Relax and enjoy the next 364 days before you have to do this all over again 🙂
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Source: Market Watch