Still Haven't Paid Your Income Taxes?
To receive your 2008 economic stimulus payment, you may need to file a 2007 return even if you normally don't have to file.
Today’s topic is about what to do if you (or someone you know) hasn't filed or paid their U.S. income taxes.
Now, let's talk taxes...
When Are They Due?
Whether we like it or not, income taxes are a requirement that we can’t avoid without serious consequences. I’m sure almost everyone who’s listening knows that individual income taxes for each calendar year are due on April 15th of the following year.
April 15th is also the deadline for payment of first quarter estimated income taxes. If taxes are not withheld from your income, you may be required to make quarterly estimated tax payments for the current tax year. This would be the case if you're an independent contractor, for example.
Who Has to Pay?
So, how much money do you have to make before you’re required to pay income taxes? The lowest income category is for a single person under the age of 65. Under current law, these folks have to file an income tax return when their gross income reaches or exceeds $8,750 a year.
Here's a link to the current tax chart that shows filing status, age, and minimum income requirements for paying income tax.
Get Your Economic Stimulus Payment
If you didn’t file a 2007 return because your income wasn’t high enough, you may still need to file one this year in order to receive the 2008 Economic Stimulus Payment. This is how the IRS will know your name, address, and eligibility for the refund.
To receive a stimulus payment, you must have a valid Social Security number, have at least $3,000 of 2007 income, and file a 2007 tax return. The IRS began issuing these refund payments to more than 130 million eligible taxpayers in May. Check out the show notes for more information and resources about the Economic Stimulus Payment.
The Consequences of Non-Payment
Many people don’t file tax returns because they don’t have enough money to pay their full debt. Or they think that since they owe very little, they can send the return in late. But let me tell you why using either rationalization is a bad idea.
There is a penalty for filing late AND a penalty for paying late. The penalty for filing a late return is generally 5% per month up to 25% of the entire amount of tax due. The penalty for paying late is ½% per month up to 25% of the unpaid amount of tax due.
So, if you owe tax money that you can’t pay, remember that you still need to FILE the tax return. I’m going to repeat this because it’s very important. Always file tax returns by their due dates, whether or not you can remit any money. The only exception to this rule would be if you're getting a tax refund, in which case there's no penalty for filing late.
In addition to the monthly penalty for paying late, there’s interest calculated on any taxes that remain unpaid. The interest rate changes quarterly and has been as high as 9% and as low as 4% in recent years.
Paying with Credit
I’m not a proponent of carrying a balance on credit cards, but doing so for an on-time payment of income taxes may be one situation where it’s wise to do so. Even taking out a loan or dipping into a line of credit to pay taxes may cost much less in the long run when compared to the combination of penalties and interest imposed by the IRS code. Making full payment of taxes on time will usually save you money when analyzing your options.
How to Get More Time to File
Form 4868 is the Application for Automatic Extension of Time To File U.S. Individual Income Tax. Submission of this form gives you an extra 6 months, or until October 15th, to file your return.
An extension does not, however, give you any extension of time to pay your debt! If you file the extension by April 15th, you can’t be penalized for sending in a late tax form, but you will still be charged penalties and interest on the unpaid tax balance every month, until it’s paid in full. I have a full episode devoted to pros and cons of filing for extensions, so please check it out for more information.
If you experience some serious or undue hardships that keep you from being able to pay your income taxes, you need to contact the IRS. They can help you determine your options based on individual circumstances. It’s important that you voluntarily make arrangements to pay your tax debt.
Why You Should Pay Up
If you don’t make any effort to file and pay taxes, the IRS will file a substitute return for you. Their return probably won’t be as favorable as the one you would file for yourself. It could actually increase the amount of taxes you owe because the IRS won’t include any additional exemptions or credits to which you may be entitled.
Then the IRS will send you a tax bill, which begins the collections process. If the bill is not paid, they will take enforced collection actions, such as confiscating your bank accounts; taking your wages, retirement income, Social Security benefits; putting a federal tax lien against your property; or seizing assets such as cars, boats, etc
This will do damage to your credit rating and make it very difficult for you to borrow money to pay the tax bill! So you need to exhaust all financial resources before letting a tax delinquency get this far, because your options for payment will become very limited.
If you’re self-employed and choose not to file a return on taxable income, be aware that you’re reducing the amount of Social Security benefits that you’ll receive. The Social Security Administration calculates benefits due taxpayers directly from their tax returns. And without completed tax returns, you’ll also have difficulty getting approved for credit, loans, mortgages, or federal aid.
If you haven’t filed a tax return or an extension for your 2007 income taxes, go ahead and file and make arrangements to pay as soon as possible to avoid additional penalties and interest.
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Chi-Ching, that's all for now, courtesy of Money Girl, your guide to a richer life.
Economic Stimulus Payment
Do You Need to File a Federal Income Tax Return?
Economic Stimulus Payments Center
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