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Avoid Paying Taxes On That 1099 Form, Legally

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IRS form 1099tax magnifiedIt’s tax time and the mails are full of IRS form 1099.

If you managed a short sale of your property; suffered a foreclosure; filed bankruptcy; or settled your debt for less than you owed, you probably got a 1099.

But that’s not the end of the tax story.

Receipt of the form does not mean  that you must include the reported sum as income.

Please repeat:

mere receipt of the form does not mean you are necessarily paying taxes on that money.

Form 1099 is an informational form.  It is sent out routinely and without much thought on the creditor’s part.

When real property changes hands or when a debt is forgiven,  the creditor involved is required to report the transaction to the IRS.  You,  the potentially affected taxpayer, get a copy.

Here’s the action plan to avoid paying more tax.

Claim the exceptions to the rule

The Internal Revenue Code starts with the proposition that debts that are forgiven increase your net worth.  In IRS-think, there must be a tax due.

But there are exceptions.  The three most important exceptions for my clients:

  1. Bankruptcy
  2. Insolvency
  3. Qualified mortgage indebtedness

Fit in one of these exceptions and the cancelled debt does not get added to your taxable income.

To establish your right to exclude the money shown on the 1099, you have to file IRS form 982.

If you don’t file the form and claim the exception, the IRS has no way to know that, despite the debt forgiveness, there is no tax payable.

Form 982 tax-avoiding choices

Form 982 lays out the possible reasons forgiven debt might not be taxable.

Bankruptcy–  A discharge in bankruptcy forgives the debt without tax consequences.  It’s the first exception found on Form 982.  Bankruptcy law is found in Title 11 of the United States Code. The tax exception applies to the discharge of debt in any chapter of bankruptcy.

Insolvency–  Perhaps,when the debt in question was forgiven, you still owed more to other creditors than the value of your assets.  You don’t have to include the forgiven debt in your income.  You were insolvent.  Note, however, that the solvency calculation here includes the value of retirement assets that your creditors can’t reach.  Many people who have little net worth outside of retirement savings are actually solvent when you add in pensions, etc.

Qualified mortgage indebtedness-  With the Great Recession and a slew of foreclosures, Congress enacted a short term safe harbor for the debt forgiven on a principal residence.  The loan must have been was used to buy or improve the home.  The law was recently extended to include tax year 2016.

In case of mistake

Another situation where you might get a 1099 but not owe tax is where you had no personal liability for the debt;  that is, the debt forgiven was a non recourse debt.  The foreclosure agent probably has no way to know whether the lender had a right to sue you.

When your debt wasn’t really cancelled

If none of the other exceptions to inclusion in income apply, make sure you consider whether you had personal liability for the debt.  If not, seek to have the 1099 corrected, or attach an explanation to your tax return with the facts of your situation.

Remember, just because they sent you the form doesn’t mean you owe the tax.

More on tax return issues

Mortgage interest missing from Form 1098

Tax deductions hidden in Chapter 13

Tax question roundup

Are you insolvent for cancellation of debt purposes

Consequences of unfiled returns

Image courtesy of IRS EIN

 

10 Things Tax Professionals Need To Know About Bankruptcy

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accountant-flickr-charlywkarlTax season approaches.

Tax preparers stand a good chance of encountering clients who either have filed bankruptcy, or who may benefit from a bankruptcy filing.

Here’s my list of bankruptcy nuggets that a good tax professional should have at hand.

Debts discharged in bankruptcy don’t trigger cancellation of debt income–

One of bankruptcy’s compelling features is that the debts cancelled by reason of the bankruptcy discharge don’t get included in the debtor’s income.  Bankruptcy, found in Title 11 of the U.S. Code, is the first exception on Form 982 to inclusion of forgiven debt in gross income.

IRS and state tax entities subject to the automatic stay  

A bankruptcy filing enjoins tax authorities from continuing collection action.  Thus the stay terminates garnishments and prohibits levies of the debtor’s assets.  It doesn’t, however, prohibit tax audits.

Bankruptcy can discharge income tax debt three years after return due

Taxes can be wiped out in bankruptcy if the return was due, including extensions, three years  or more before the bankruptcy is filed; any late filed return has been on file for 2 years; and the taxes were assessed more than 240 days before the commencement of the case.  More on overview of taxes in bankruptcy.

Chapter 13 is a quick and certain alternative to an OIC–

A  Chapter 13 plan is confirmed within weeks and binds the IRS just like any other creditor. The case discharges for all time the scheduled taxes, penalties and interest upon plan completion.  The plan must pay the priority taxes (those tied to returns less than three years old) and the interest on the priority tax as of the filing.  No new interest or penalties accrue during the pendency of the case.

Tax penalties are dischargeable

Penalties associated with dischargeable taxes are dischargeable;  all penalties are dischargeable in Chapter 13, and penalties associated with events more than three years past are dischargeable in Chapter 7 even if the tax isn’t dischargeable.

Chapter  7 estate, but not 13 estate, is a separate taxpayer

A bankruptcy estate owes the feds a return, and perhaps tax on capital gains it realizes by reason of sale or foreclosure.   Property remains property of the bankruptcy estate until the estate is closed or the property abandoned.

Tax attributes of the debtor pass to the bankruptcy estate  

The debtor’s basis, loss carry forwards, and exclusions are available to the Chapter 7 trustee, and revert to the debtor when the bankruptcy estate closes.

Debtor can elect short tax year for the year bankruptcy is filed  

A short year election can make tax attributes available to the debtor when he files the return for the pre bankruptcy portion of the year.  It can also quantify any tax due in the year of filing so that it is a priority claim for payment from the assets to be distributed in the bankruptcy case.

Tax liens generally survive the bankruptcy case

While lien survive as a charge on the assets the debtor owned at the filing of the case, the lien does not attach to assets the debtor acquires after the case is filed.  In Chapter 13, the lien need be paid only to the extent of the actual value of the assets subject to the lien.

Allowable deductions may be found in payments made on debtor’s behalf by Chapter 13 trustee

Chapter 13 plans often pay over time mortgage interest arrears  on the debtor’s home.  State taxes paid through the plan or business expenses including taxes may be deductions the Chapter 13 debtor can claim.

The rules covering federal taxes in bankruptcy are found in Pub. 902.  State taxes are subject to the same treatment in bankruptcy as federal taxes.

For more

For help with strategic use of bankruptcy to solve tax problems, look for a certified bankruptcy specialist in your community.

Some state bar associations and the American Board of Certification  certify lawyers who are specialists in bankruptcy.  Find California bankruptcy specialists by county.

Image courtesy of Flickr and CharlywKarl

Five Tax Tips For Two Cents

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8328967338_37e260ff6b_h_optTax season approaches.

There’s a surprising degree of overlap between bankruptcy and tax I’ve found over three decades as a bankruptcy lawyer.

Here’s my two cents on what I know about taxes.  It’s not a lot, but what I know is both simple and critical.

File those tax returns

Lots of folks who end up in my office discussing bankruptcy held off filing their returns because they figured they couldn’t pay the tax that would be due.

Bad decision.

Without a return, taxes never die

The IRS will not descend on you the week after you file a return with tax due.  They’re still opening envelops.

But filing a return gets all kinds of time periods running that may benefit you:  the 3 years til the taxes are dischargeable in bankruptcy;  the 10 years til the tax collection statute runs.

Don’t pay tax on discharged debt

If your debts were discharged in bankruptcy last year, that discharge has no tax consequences.

The Internal Revenue Code specifically excludes from taxable income any debts forgiven in bankruptcy.

Cancellation of debt is tax free

You may get a 1099 reporting the cancelled debt.  The creditor whose debt is forgiven is required to do so.

It’s up to you to assert that there’s an exception to tax.  And there’s an IRS form to rebut any tax consequences.  Get it and file it.

Claim deductions for Chapter 13 payments

If you’re in a Chapter 13 that catches up arrearages on real property loans, claim those payments as deductions of your own.  Just because the trustee writes the check, it’s still you paying the mortgage interest in that payment.

How to find and claim the deduction

The concept here goes beyond mortgage interest.  If the expense was deductible had you written the check, it’s deductible if the trustee pays it.

Get the trustee’s disbursement records in your case from  the trustee’s web site and get to deducting.

If you owe tax, fix your withholding

The return to be filed this spring can tell you if you are withholding enough money to pay your taxes.

If there’s a big number on the bottom line of the return for last year, and this year looks similar, increase your withholding now.

What Goldilocks knew about taxes

And if you think you can’t pay taxes as you go and support the rest of your living expenses, you need to look hard at the big picture.

It’s generally a poor decision to short the feds so you can pay AmEx or Visa.

Amend old returns if you missed something

If you missed a deduction or otherwise overpaid your taxes in a previous year, you have only three years to amend that return and claim a refund.

Time running out to claim prior year tax breaks

Lower income families often miss the fact that they get a tax credit (that’s real money, not just a deduction) under the Earned Income Tax Credit.  Find out if you are eligible.

The One Person You Must Tell About Your Bankruptcy

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Spill the beans concept.Most people who file bankruptcy don’t want anyone else to know.

Some of my clients try to hide their break for financial freedom from friends and neighbors.

Others are worried about their boss finding out.

Occasionally, someone will try to keep it from their mate.

But trying to hide his bankruptcy nearly cost one client $103,000!

Because he hid his bankruptcy filing from his accountant. [Read more…]

Pay No Tax On Forgiven Debt

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1099 tax

When it’s tax time,  questions about forgiveness-of-debt income are everywhere.

Questions start when you receive a Form 1099 from a creditor.

But for my bankruptcy clients, the answer is simple:

Debt forgiven in bankruptcy is not taxable.

Tax on cancelled debt

Debt may get cancelled in lots of ways:

  • in a short sale;
  • by compromising a debt
  • by lender compliance with a settlement agreement with the feds;
  • in a bankruptcy; or
  • in a foreclosure.

Lenders and debt collectors believe themselves bound to send out a 1099 whenever they handle a transaction that may implicate cancellation of debt.   They aren’t rendering an opinion on the tax treatment of the event.  They are just reporting it to the IRS.

Receipt of a 1099 is not the final word on the topic; it’s only notice that the transaction in question has been reported to the IRS.

Cancellation of debt “income”

The standard rule is that debt that is cancelled is treated as though you had received that much cash, and that pseudo-cash is treated as income.  And, if it’s income, the IRS thinks it’s taxable.

The exceptions to recognizing that transaction as income  found in IRC 108 include

  • insolvency at the time, and
  • discharge of the debt in bankruptcy.

Qualified principal residence exclusion available for tax year 2017

You have to file an IRS form to rebut the 1099.  It’s form 982 and right at the top are the boxes to check to invoke the exceptions.

The form also includes a worksheet to see if you are insolvent for the purposes of this provision of law.

If the 1099 got the facts wrong

Remember, too, that if you did not have personal liability for the debt, the cancellation of that debt is not even forgiven debt.  There was no debt.

You may have no personal liability because of a previous bankruptcy or by reason of California’s anti deficiency laws.

Also, there is special legislation dealing with cancellation of debt upon loss of a primary residence, excluding phantom income from qualifying transactions.

Here’s the IRS on the subject:  http://www.irs.gov/taxtopics/tc431.html

More

Deductions hidden in Chapter 13

File even if you can’t pay

Discharging taxes in bankruptcy

Don’t File Bankruptcy In December

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wait to file bankruptcyBankruptcy can wipe out taxes, but there’s a catch.

File bankruptcy before the end of the year and you fix only a part of your tax problems.

Tax troubles are at the heart of so many bankruptcy filings.  It makes sense:  bankruptcy is a powerful and predictable tool to get out of tax debt.

Yet I’ve been telling clients for weeks now:  don’t file bankruptcy…..yet.

Wait til January.

Why wait to discharge taxes

Because most people who owe back taxes are facing similar trouble for the current tax year.

Come the end of this tax year on December 31st, they’ll owe taxes for 2018 because their withholding doesn’t match the taxes due in April.

In Chapter 13, which is almost always the better chapter for tax troubles, the Chapter 13 plan doesn’t address tax years that aren’t closed when the case is filed.

That means that your liability for the year in which you file bankruptcy doesn’t get priority for payment over your credit card debts.  In fact, the open tax year often can’t be paid through the plan.

And I hate to see money go to general unsecured creditors when tax debt remains.

So, I’m counseling clients to wait til January to file.  Get this current year’s tax troubles rounded up and corralled in the Chapter 13.

Buy yourself 5 years to pay whatever you owe for this year along with the taxes that brought you in my door in the first place.

Tax liens in bankruptcy

Another one of Chapter 13’s superpowers is the ability to cut tax liens down to size.

No matter how huge the tax liens are, in Chapter 13 those liens get paid only the value of your possessions when you file your case.

Really, the liens get paid only the equity in your assets that remains after liens that were filed before the tax lien.

So even if the tax lien is $100,000, if the equity in your possessions is only $10,000, that’s what you pay over the 5 years of the plan.

And after the case is  over, the balance of the lien is voided along with the tax liability that it secured.

Pretty neat, eh?

When IRS threatens to levy

A notice of intent to levy is often what makes folks call up a bankruptcy lawyer.  That notice seems to promise doom and the end of life as you know it.

Know that an actual levy is the IRS’s last resort.  There are processes and procedures built into the Service’s collection process.

A levy gets only what’s in the levied bank account on the day the levy is served.  If the bank balance is tiny, the IRS’s recovery is tiny.

Usually, if you engage the IRS in discussions about a payment plan, or even make a payment on your debt, your case becomes a lower priority for an understaffed IRS.

It depends on the numbers, of course, but usually, the advantages to waiting til January 1 outweigh the risk of collection between now and then.

Once your case is filed, the IRS, along with every other creditor, is forbidden to continue collection action.

Before you file bankruptcy

There’s lots to do to prepare for a bankruptcy filing.  These weeks won’t be wasted.

Why your bankruptcy papers are critical

Your bankruptcy attorney will need lots of paper from you to get your schedules right and to calculate a plan to get you out of debt.

Some of the things you’re likely to need include:

  • Pay stubs for the past six months, including December’s
  • Tax return
  • Contract for any financed vehicles
  • Tax notices from federal and state
  • Appraisal or broker’s opinion on the value of your real estate
  • Proof that your retirement accounts are exempt
  • Bank and investment account statements

You also need to prepare to get your tax return for this year filed quickly after your bankruptcy is filed.  You have 45 days from the filing of your Chapter 13 to get the return filed.  So start gathering whatever you’ll need to get the return on file promptly after your bankruptcy case is filed.

And, readjust your withholding for next year so you are adequately withheld for the coming year.  Owing more taxes once you are in bankruptcy is grounds for the dismissal of your case.

Find a good bankruptcy lawyer

Bankruptcy is difficult enough.  You need to have confidence and rapport with your bankruptcy lawyer.

Use the time between now and the first of the year to interview a bankruptcy lawyer and find one with experience in tax matters.

How to interview a bankruptcy lawyer

It’s equally important to find a lawyer to whom you are willing to confide your secrets and your worries.  The problem I can’t protect you from is the one you don’t tell me about.

So when you hear those screeching commercials that say “don’t file bankruptcy”, you can add, “yet”.

File bankruptcy at the right time for the right reason.

If The IRS Comes Calling After Your Bankruptcy Discharge

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tax after bankruptcyIt’s scary, or infuriating, when the IRS continues to try to collect taxes discharged in bankruptcy.

What was the point of filing bankruptcy if the government ignores your discharge?

Yet IRS attempts to collect taxes from people with a bankruptcy discharge form the single largest group of cases in my law office today.

Why the IRS persists

Seldom is the IRS correct that taxes are still due.

Sometimes, the IRS is confused.  Other times, they appear to be indifferent to the bankruptcy discharge.

Too often, I suspect that their record keeping system is not up to the job.

But, whatever the excuse, you need to get it sorted out.  Let’s look at common issues found in IRS collection letters after bankruptcy.

Tax lien lives on

The most common letter from the IRS after a bankruptcy concerns tax liens that survive the bankruptcy.

A Chapter 7 discharge does not affect tax liens.  Tax liens pass through a Chapter 7 unaltered.

When a tax is discharged in bankruptcy, the tax lien does not attach to assets acquired after bankruptcy

Whether by design or not, the IRS letter to taxpayers emerging from bankruptcy with a surviving tax lien is poorly written.  It  doesn’t clearly spell out that the tax the IRS is trying to collect is just the sliver of taxes that attached to assets of value owned when the case was filed.

What to do?  Decide if the continued existence of the lien makes any difference in your economic life.  If you need to apply for significant credit, you may want to wipe out the lien by paying the value of the “stuff” it attached to when you filed.  If the lien attaches only to personal property with little real value, you may choose to simply let the lien die of old age.  Taxes are generally collectible only for 10 years from the date they are assessed, with some time added for time in bankruptcy.

IRS failed to credit taxes paid in Chapter 13

Can’t tell you how often this comes up.  The IRS is little better than mortgage servicers in keeping track of the money it is paid.

Occasionally, the confusion arises when only one of a married couple filed Chapter 13.  Somehow, the IRS didn’t connect the taxes paid through the Chapter 13 plan with the tax liability of the non filing spouse, even when the liability was joint.

Similarly, if the taxes arose in a business, the IRS may not have recognized that taxes paid by an individual or that individual’s Chapter 13 trustee were on account of business taxes.

What to do?  If a polite letter pointing out that the tax has been paid doesn’t fix the problem, the collection actions violate the discharge injunction in the bankruptcy case.  Brought to the attention of a bankruptcy judge, the IRS may get its knuckles rapped and be ordered to pay your attorneys fees and any damages you suffered.

IRS doesn’t understand the community property discharge

The Bankruptcy Code has been around in its present form for nearly 40 years, but the IRS can’t get its head around the community property discharge found in §524(a)(3).

That statute says that the bankruptcy discharge granted to one spouse protects a couple’s community property acquired after the bankruptcy filing from debts discharged in bankruptcy.

So, taxes discharged in one spouse’s bankruptcy can’t be collected from the community property of the spouse who didn’t file. (The non filing spouse may be exposed to collection if that spouse has separate property and is also liable for the tax).

What to do?  Start by educating the IRS.  Point out that your spouse has a discharge, you remain married, and your community property is protected from pre bankruptcy tax collection.  This one is trickier, since the IRS has legitimate rights to collect from separate property, if there is any.

You miscounted the passage of time

Consider whether the mistake might be yours.  The bankruptcy discharge doesn’t list the debts discharged in your case;  it simply says that the dischargeable debts are discharged.

The central factor controlling whether the unsecured portion of a tax is discharged is the interval between the assessment of the tax and the filing of the bankruptcy.  The calculation can be complicated by prior bankruptcy filings and other events that pause the clock.

What to do?  Get an experienced bankruptcy attorney or a tax professional to review whether the tax the IRS wants to collect was really discharged.  If it was discharged, go back to court for help from a bankruptcy judge.

IRS simply screwed up

It happens these days more than it used to.

The IRS is understaffed and technologically challenged.  They make mistakes.

If the IRS, or any other taxing authority, had notice of the bankruptcy filing, they are legally obligated to honor the discharge, even if it’s hard to do.

What to do?  First off, write a letter with the proof that the taxes are discharged.  Usually that means sending a copy of the bankruptcy schedules listing the IRS and a copy of the discharge along with the collection letter they just sent.  Most bankruptcy judges want you to give the offending creditor a chance to fix the problem before running back to court.  You set yourself up for a better result in court when you’ve made a business-like attempt at self help and been brushed off.

Bottom line

The bankruptcy discharge does apply to taxing authorities.  Just because it’s the IRS doesn’t mean they are right.

More

Discharging taxes in bankruptcy

Debt collectors after your discharge

Who to pay after bankruptcy

 

Tax Deductions Hidden In Chapter 13

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taxesDon’t miss the tax deductions hiding in your Chapter 13 plan payments.

The same, very important debts that your Chapter 13 plan pays are often tax deductible.

And you are still the person who’s paying, even if the trustee writes the check.

Deductions in bankruptcy

Let’s look at some common deductions lurking in the Chapter 13 disbursements.

Mortgage interest  If your Chapter 13 plan is catching up on delinquent mortgage payments, the claim of the lender is probably mostly interest.

Taxes  Property taxes paid through the plan should be deductible.  Likewise, state income taxes paid by the trustee are deductible.

 Business expenses  If you operate a business in Chapter 13 or operated one before you filed, you may be paying business leases, sales taxes, or vendor debt through the plan.

Get the info you need

In my experience, you have to dig out the information on deductible payments;  I have not seen lenders sending 1098’s reporting mortgage interest paid to debtors when the checks come from the trustee.

Step by step to claiming the mortgage interest deduction

But most if not all Chapter 13 trustees are on the web, and debtors can access the trustees reports of which creditors have been paid this year.

Pull up the report of last year’s disbursements and flag the payments that are deductible.

Save the printout of the trustee’s report in case of question  by the taxing authority.  The IRS will not have gotten a matching report from the lender who got the money and hasn’t reported it to you and the IRS.

How to treat 1099’s on foreclosures and short sales

Go back to prior tax years

If your plan is paying deductible expenses and you’ve been in the bankruptcy case for several years, you may want to look at prior year trustee reports.  Overlooked deductions might justify going back to amend a prior return.

Tax returns are generally amendable for three years.

Check it out

Take this post with a grain of salt, or rather, take it to a tax professional.

I am a bankruptcy lawyer and what I know about taxes, I’ve learned on the job.  But I am convinced that Chapter 13 debtors are missing legitimate tax deductions by overlooking what the Chapter 13 trustee has paid on their behalf.

What your tax professional should know about tax and bankruptcy

Image courtesy of 401(k)calculator.org

Cut Tax Penalties In Bankruptcy

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redwood-pixabay_opt

Get in tax trouble and the penalties often grow huge.

What starts as a manageable problem can soon tower over you.

Breathe deep;  there is a solution.

Chapter 13 bankruptcy can cut tax penalties down to size.

All tax penalties discharged in 13

Old or new, large or small, Chapter 13 discharges all unsecured tax penalties.

In contrast, Chapter 7 discharges some tax penalties.

 Discharged are penalties for taxes that are themselves dischargeable.

Also dischargeable in Chapter 7 are penalties where the transaction or event that triggered the tax occurred more than three years before filing, whether or not the tax itself is dischargeable.  523(a)(7)(B).

That’s good, but if you are eligible, Chapter 13 is better.  All penalties are discharged.

Who can file Chapter 13

Chapter 13 is available to individuals (no corporations or LLC’s), with regular income, whose debts total less than the caps for secured and unsecured claims.

You know if you are a real person and whether you have regular income, so the thing that needs analysis is the allocation of your debts between those that are unsecured (the creditor has no lien on your assets) versus the debts for which there is a lien.

To be a secured claim in bankruptcy, that lien has to attach to an asset that has market value greater than any liens senior to it.

Tax liens don’t go to the head of the line just because they are debts owed to the government.  They fall in line behind any other lien holder who perfected their lien before.

Recent taxes must be paid

Chapter 13 plans are written by the person who has filed the bankruptcy case.  The Bankruptcy Code requires, however, that recent income taxes be paid in full through the plan.

Note that it is the TAX and the INTEREST on that tax that have to be paid during the life of the Chapter 13.

Penalties get treated just like personal loans, medical bills, and credit card debt:  what that class of creditors gets in the Chapter 13 is driven by the means test and the best interests of creditors test.   In most Chapter 13 plans, that’s little, or nothing.

Chapter 13 cuts those penalties down to size.

Tax liens whittled down

toothpicks-pixabay_optThe discussion above deals with unsecured taxes and tax penalties.  The rules change when a tax lien is filed.

At its simplest, a Chapter 7 discharge eliminates the IRS’s ability to levy your bank account or garnish your wages for taxes that have been discharged.

However, the Chapter 7 discharge doesn’t alter any tax lien recorded before the bankruptcy, even if the taxes themselves are discharged.

If the tax liability is discharged, any lien in place will not attach to assets you acquire after your bankruptcy is filed.

More about tax liens after bankruptcy

Chapter 13 does alter tax liens.  (See why I’m a fan of 13?)

Chapter 13 treats as a secured claim only that part of a lien that attaches to real value in the taxpayer’s assets.

Put bluntly, if you don’t have any assets, then the lien is worthless and will be voided at the conclusion of your Chapter 13 plan.

Oh, technically,  the tax lien may attach to your household goods, all right.  But those things have very little market value.

Pay the resale value of your pots and pans through the Chapter 13 plan, and the lien is deemed satisfied.

If you can’t cut a deal with the IRS that eliminates the tax penalties as part of an offer in compromise or payment plan, you have bankruptcy options for tax penalties.

More about Chapter 13

Get rid of credit card balances without paying interest

Why Chapter 13 Plans Fail

How Chapter 13 Works

Images courtesy of Pixabay. 

 

Stop Making Quarterly Tax Payments

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quarterly tax paymentUncle Sam expects a quarterly tax payment from the self employed since you don’t issue yourself a paycheck with regular tax withholding.

Make this the last quarterly tax payment you pay.

Seriously.  Don’t make any quarterly payments for this coming year.

Think I’m advocating tax resistance?  No way.

The tax collectors  have more weapons than you want to encounter.  It’s like the advice from the era of newspapers:  don’t pick a fight with someone who buys ink by the barrel;  

Don’t spit in the face of the tax man.

Give up making them quarterly, I say.

Pay taxes monthly, just like every other recurring bill in your life.

Folks who get a paycheck have their income tax liability, or at least some estimate of that liability, deducted from each paycheck.  No fuss, and, well,  only some bother.

Their take home pay has already paid the taxes.  The paycheck is what is available to pay the bills.

Not so the self employed.

We are expected to make quarterly estimated tax payments in January, April, July, and October.

I’m sure the quarterly arrangement was seen as a convenience when instituted.

But it’s not necessarily convenient.  You have to set aside money regularly so you have a fistful come quarter day.

If you free lance or run a small business, budgeting may be the hardest think you do.  Who knows, in this economy, how much you’ll make this quarter, or how you’re going to pay the bills?

Quarterly payments invite us to fudge.

Get caught not having prepaid enough and you get  hit with penalties.

Get really behind, and it’s tax liens and levies.

Pay this year’s taxes monthly

My charge?  Add Uncle Sam to your list of creditors that you pay monthly.

Most creditors expect monthly payment:  the rent, the car payment, the credit card.  Add your estimated taxes to that list.

Income taxes are a cost of doing business.  No reason not to pay them as you go, just like the folks on salary do.

  • You avoid the need to set up a separate savings account in which to accumulate the taxes to be paid quarterly.
  • You resist the temptation to use those savings for some intervening crisis.
  • You escape the urge to make no provision “just this month”.

Making regular and smaller payments makes it easier to get the total bill paid in a manner that avoids penalties for not paying regularly.

Send your monthly income tax prepayment to the same place the quarterlies were headed.  Write on your check your Social Security number and “estimated 2017  tax liability”.

Take care of taxes monthly and you don’t find yourself in a tax hole come next April.

Here’s the IRS  on making estimated tax payments.

More on taxes

Unfiled taxes live forever

Dig out of payroll tax trouble

Getting rid of tax liens

Image courtesy of Wikimedia.

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Redwood City, CA 94063
Phone: (650) 694-4700

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