Topic No 202 Tax Payment Options
If you’re not able to pay the tax you owe by your original filing due date, the balance is subject to interest and a monthly late payment penalty. There’s also a penalty for failure to file a tax return, so you should file timely even if you can’t pay your balance in full. It’s always in your best interest to pay in full as soon as you can to minimize the additional charges.
Paying electronically is a convenient way to pay your federal taxes online, by phone for or card payments, or from a mobile device. Electronic payment options are available on our payments page and the IRS2Go app. When paying electronically, you can schedule your payment in advance. You’ll receive instant confirmation after you submit your payment. You can opt in to receive email notifications about your payments. The IRS uses the latest encryption technology making electronic payments safe and secure. It’s quick, easy, and much faster than mailing in a check or money order.
You can access your federal tax account information through a secure login at irs.gov/account. You can view the amount you owe along with details of your balance, view your payment history, access Get Transcript to download or print your tax records, and view key information from your current year tax return as originally filed. In addition, you can pay using your bank account or a debit or credit card or apply for an online payment agreement if you need more time to pay.
How Federal Tax Brackets Work
Tax brackets are not as intuitive as they seem because most taxpayers have to look at more than one bracket to know their effective tax rate.
Instead of looking at what tax bracket you fall in based on your income, determine how many individual tax brackets you overlap based on your gross income.
Figuring that out is easier in practice:
- Example one: Say youre a single individual who earned $40,000 in the year. Technically, youd be aligned in the 12 percent tax bracket, but your income wouldnt be levied a 12 percent rate across the board. Instead, you would follow the tax bracket up on the scale, paying 10 percent on the first $9,875 of your income and then 12 percent on the next chunk of your income between $9,876 and $40,125. Because you dont make above $40,125, none of your income would be hit at the 22 percent rate.
That often amounts into Americans being charged a rate thats smaller than their individual federal income tax bracket, known as their effective tax rate.
- Example two: Say youre a single individual in 2020 who earned $70,000. You would pay 10 percent on the first $9,875 of your earnings then 12 percent on the chunk of earnings from $9,876 to $40,125 , then 22 percent on the remaining income
- Your total tax bill would be $11,905.50. Divide that by your earnings of $70,000 and you get an effective tax rate of 17 percent, which is lower than the 22 percent bracket youre in.
Contribute To Your Hsa
Contributing to a Health Savings Account, or HSA, is another great way to lower taxes. Granted, not everyone has access to one of these accounts, so if you dont, dont feel left out.
One of the requirements of an HSA is to be on a high-deductible health insurance plan, which is not necessarily a good thing. But for people on these plans, HSAs can be a great way to both prepare for those expensive, high-deductibles, and save some money.
If you have access to an HSA, you should know that all of your contributions are tax-deductible! When you put money inside these accounts, it will be subtracted from your taxable income, just like retirement account contributions. Putting money inside your HSA is a great way to lower your taxes for the year.
If you need more persuasion, there are even more benefits that come with an HSA. You can use the money inside to pay for qualified medical expenses, tax-free. Then, when it is used for medical expenses, that money is not taxed when it comes out.
Because the money in your HSA can also be invested, you are tapping into the power of compounding interest and market gains as well! Any growth inside your account is, again, not taxed, giving you a third money-saving benefit.
Just like Individual Retirement Accounts, HSAs also have the contribution deadline of April 15th. If you have access to an HSA but have not opened or funded it yet, now is the time!
Read Also: Buying Tax Liens In California
Borrow The Money Elsewhere
If you cant make installment payments to the IRS, consider borrowing elsewhere to pay your taxes.
Its not usually a good idea to put taxes you cant afford to pay on your . The IRS charges comparatively low interest rates, so you may be better off making payments directly to them.
The exception may be when you have a credit card with a 0% or very low rate, or when you expect to pay the credit card bill off very, very quickly.
You might look to other sources of money if necessary, such as borrowing from parents or a home equity line of credit. Or consider working overtime or selling something to get rid of that tax bill as soon as possible.
Irs Sends Nearly $15 Billion Of Advance Child Tax Credit Payments
New Treasury Department data released on the advance Child Tax Credit payments shows the distribution by state, including how much, on average, households in each state received. The expansion will only be in effect for the 2021 tax yearif policymakers wish to continue providing the increased benefits, they must address the administrative and revenue costs of the policy.
Open A Retirement Account For Your Side Hustle
If you’re a freelancer or self-employed, you have a whole different set of tax rules to navigate. “A lot of younger people dove into side gigs, like delivery services, this year,” says Greene-Lewis. “They need to realize that they’re self-employed. And the good thing about it is, there are so many deductions.”
Like folks who earn a regular paycheck, self-employed individuals can lower their income by contributing to a pre-tax retirement plan. As with an IRA, you can make 2020 contributions to a SEP IRA or a solo 401 until the tax deadline next year. If you’re using a solo 401, you’ll just need to make sure your plan is set up by the end of 2020.
How much you can set aside may depend on factors including the account you use, how much you earn, and how much you’ve contributed to a retirement plan at your full-time job.
Video by David Fang
Hold On To Investments Longer
This tax-shrinking tip is very easy: Aim for all your investment gains to be long-term ones, meaning that you held the asset for more than a year before selling it. Long-term capital gains tax rates are 0%, 15%, or 20%, with most of us probably facing the 15% one. Short-term capital gains, meanwhile, for assets held a year or less before being sold, are taxed at your ordinary income tax rate, which could top 30%, depending on your income level.
So if you’re about to sell a stock after owning it for 11 months, think about hanging on a bit longer. It’s not always the smart thing to do, but it can often save you some meaningful tax dollars. Overall, it’s good to aim to hang on to healthy and growing companies for many years.
Read Also: Is Plasma Donation Taxable Income
Problems With Tax Relief Companies And Representatives
The IRS Office of Professional Responsibility targets questionable practices in the tax debt resolution industry. Report problems to the IRS on Form 14157, Complaint: Tax Return Preparer. The IRS Return Preparer Office will process the complaint and, if appropriate, submit it to the IRS Office of Professional Responsibility for investigation.
Behavior warranting a complaint to the IRS includes companies or individuals that:
- promise that you will get relief from tax liabilities
- misrepresent how long it will take to process a debt relief request application or
- omit relevant asset information on financial statements submitted to the IRS.
You also may file a complaint with the FTC online or by phone: call 1-877-FTC-HELP. The FTC enters consumer complaints into the Consumer Sentinel Network, a secure online database and investigative tool used by hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.
Enroll In A Tax Relief Program
Your state may also offer a tax relief program for low-income individuals. This is awarded as a rebate or tax credit that is intended to cover a portion of your property tax bill. How much you receive depends on your income and your property assessment. To be eligible, your total household income must fall below a certain level. In some states, you must also be a senior, a veteran or disabled but plenty of states offer this program to all low-income individuals. Check with your state’s department of taxation to find out what relief programs are available.
Read Also: Efstatus Taxactcom
States Respond To Strong Fiscal Health With Income Tax Reforms
As states close their books for fiscal year 2021, many have much more revenue on hand than they anticipated last year. Eleven states have responded by reducing income tax rates and making related structural reforms as they strive to solidify a competitive advantage in an increasingly competitive national landscape.
Congress Approves Economic Relief Plan For Individuals And Businesses
The CARES Act, now signed into law, is intended to be a third round of federal government support in the wake of the coronavirus public health crisis and associated economic fallout, following the $8.3 billion in public health support passed two weeks ago and the Families First Coronavirus Response Act.
You May Like: Where Is My State Refund Ga
Set Up A Health Savings Account
While were talking about health insurance, lets talk about the HSA, a Health Savings Account. I love this investment vehicle. In fact, its the first place I tell my clients to place their money. Why? Well, its the only account that Im aware of, to date, that you can make a deposit and get a tax reduction. Additionally, if you use the money for qualified purposes, the money comes out tax-free. I dont know of any other accounts like that. Sure, 529 plans may provide tax benefits on a state-by-state basis, but for a federal tax reduction, the HSA is the best place to put your money.
A family can deposit $7,100 as long as you meet eligibility requirements for the HSA. Individuals can contribute up to $3,550 into their HSA accounts. Any contributions you make are a great way to reduce your taxable income. For example, if you contribute the maximum $7,100 to your familys HSA and youre in a 50% tax bracket, you can reduce your tax liabilities by $3,550. Thats a nice return on your investment into a tax-free account! It also benefits your life long-term.
RELATED READING:Health Savings Accounts: Why They Are Useful and How to Set Up
Can States Close Budget Deficits With Excise Tax Hikes
We examine whether excise taxes are a solution to budget deficits, and while the short answer to that question is no, there are of course nuances. Excise taxes can play a role in state revenues even as policymakers appreciate that excise taxes are not viable long-term revenue tools for general spending priorities.
Recommended Reading: How To Get A Pin To File Taxes
Above The Line Deductions For 2021
Above the line deductions reduce a taxpayer’s adjusted gross income and are allowed regardless of whether you itemize or take the standard deduction. Above the line deductions are important because reducing your AGI may help you qualify for additional deductions or credits on your return. High-income earners may consider the following above the line deductions:
Health savings account contributions. HSAs are triple tax-advantaged accounts: Contributions are tax-deductible, the money grows tax-free, and withdrawals are tax-free for qualified medical expenses for those under age 65, and for any purpose if you are age 65 or over. The contribution limits for 2021 are $3,600 for individuals and $7,200 for families. If you are age 55 or over, you can contribute an extra $1,000.
Deductible Traditional IRA contributions. Contributions to Traditional IRAs are deductible with different income thresholds based on if you have access to a group retirement plan or not. If you and your spouse do not have access to a group plan then there is no income limit for taking the deduction. The MAGI limit to deduct contributions for a married couple with just one spouse having access to a group retirement plan is $198,000 – $208,000. If both spouses have access to a group plan then the MAGI limit for the deduction is $105,000 – $125,000. For a single filer who has access to a group retirement plan, the MAGI limit is $66,000 – $76,000.
How To Resolve Tax Debts Prior To Collection
It is important to resolve any outstanding tax you owe as soon as possible. Penalty and interest will be added to your debt and will continue to grow until the amount is paid in full. Penalty charges can range from 25% to 500% of the tax due, depending on the type of the tax!
If you do not pay your taxes, you may receive a LETTER OF INQUIRY, NOTICE OF INTENT TO ASSESS, and/or a BILL FOR TAXES DUE . This is your opportunity to resolve the debt prior to having the debt referred to collections, by either paying the amount due, appealing the assessment, or entering into an Installment Agreement. Do not wait for the Collection Services Bureau to contact you! You must immediately take action to resolve your debt to avoid collection enforcement action.
Recommended Reading: Protesting Harris County Property Tax
More From Advisor Insight:
The 0% thresholds rise to $83,350 for joint filers and $41,675 for single taxpayers in 2022.
For example, let’s say a married couple filing together makes a joint gross income of $100,000 for 2021.
With the $25,100 standard deduction, common for joint filers, the couple’s taxable income drops to $74,900, which is below the $80,800 threshold for 0% long-term capital gains tax.
If the couple has itemized deductions above $25,100 such as state and local taxes, medical expenses or charitable gifts they may claim a higher write-off and earn more income while staying below the limits, Brown said.
I have had clients with low six-figure incomes that, due to the composition of their income, paid absolutely no federal tax.Dale BrownChairman of the board at Salem Investment Counselors
And depending on the couple’s type of income, there’s potential for an even lower tax bill.
“I have had clients with low six-figure incomes that, due to the composition of their income, paid absolutely no federal tax,” Brown said, explaining how someone with only long-term capital gains, qualified dividends and tax-exempt municipal bond interest may not have taxable income.
Another strategy is someone under the threshold may sell a profitable asset, pay no long-term capital gains tax and rebuy the investment for a so-called “stepped-up basis,” adjusting the purchase price to the current value for lower taxes in the future, Brown said.
Save For College For The Kids In Your Life
If you have a kid, saving for college in a 529 is ano-brainer. But, even if you don’t have your own child, you can open a 529 planfor other kids in your life, including grandchildren, nieces and nephews, andeven friends. You could even open a 529 to save for your own college tuition ifyou’re planning to return to college.
Contributions to 529 accounts aren’t tax-deductible on thefederal level, although invested funds grow tax free. But, depending where youlive, you may be able to deduct 529 contributions from your state taxes. Infact, more than 30 states as well as Washington DC allow either deductions orcredits for 529 contributions.
Reducing your state tax bill may be more important thanever thanks to new federal limits on the deductibility of state and local taxesthat went into effect in 2018. While you used to be able to deduct allthe taxes you paid to your state from your federal taxable income, you’re nowcapped at deducting a maximum of $10,000. This new cap is called the SALT cap.
Anything you can do to bring your state taxes below thisthreshold is helpful, since you don’t want to pay federal taxes on money youhad to pay out to your state.
You May Like: How To Appeal Cook County Property Taxes
Responding To Your Irs Notice
It’s important to respond to an IRS notice. If you don’t pay your tax liability in full or make an alternative payment arrangement, the IRS has the right to take collection action. Refer to Topic No. 201 for information about the collection process.
If you’re not able to make any payment at this time, please have your financial information available and call us at or for assistance.
Seventh Times The Charm: New Jersey Passes Millionaires Tax
After six unsuccessful tries at passage, it appears the coronavirus crisis has tipped the scales in favor of Gov. Phil Murphys millionaires tax. New Jersey may be feeling the financial squeeze right now, but this large income tax change will not solve budget problems and may exacerbate funding issues by making the state even unfriendlier to businesses.
Ways You Can Still Lower Your Taxes For 2021 And Beyond
Of course, we all want to pay less in taxes but are you actually taking those steps? There might be some deductions available that youre forgetting. And even better, there are some deductions that can bring you more benefits beyond your tax bill!
So before you close the folder on your stack of tax papers, consider these three ways to lower your taxes for 2021. Keep these recommendations in mind for next year, too!