Moving to One of These 9 States Could Save You Thousands

Should you move to one of the nine states with no income tax? Here's how to decide.

Each year, taxpayers pay trillions in income taxes. In fact, the government collected approximately $3 trillion last year. If you’re like most taxpayers, you owe both federal and state taxes, which means an even bigger chunk of your paycheck goes to the government.

When you’re carrying debt — whether it’s student loans or a credit card balance — it can be frustrating to see so much of your hard-earned money leave your hands. That’s why many people consider moving somewhere with no state income tax.

According to a new study by Student Loan Hero, taxpayers could save an average of $1,977 a year by moving to a state with no income tax. But before you pack your bags, find out what factors you should keep in mind.

States Without Income Taxes

States that collect income taxes use them to fund essential programs and services for residents. More than 50% of state tax revenues go toward education and healthcare initiatives, such as Medicaid. State agencies also use collected income taxes to pay for services, including transportation and law enforcement.

Residents in most of the country must pay federal and state income taxes. However, nine states don’t levy any state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Because you don’t have to pay state taxes, you can get a significant yearly savings.

How Much Could You Save?

How much you could save by moving to a state with no income tax depends on your income bracket and where you live now. For example, Oregon workers have a state income tax of 7.75%, the highest rate of any state in the country. Someone earning the median salary in the state — $49,710 — would pay $3,851 in addition to their federal taxes.

Moving to another state to save that kind of cash can be tempting. So tempting, in fact, that 30% of survey respondents would move to a state with no income tax to save money. Moreover, 38% of respondents said they’d use their tax savings to accelerate their student loan debt repayment. (To see how student loans are impacting your credit, check out your free credit report snapshot on Credit.com..)

Using Your Savings for Debt Repayment

The savings you get from not paying state taxes can save you even more money in the long run. Using that money to repay your loan helps you pay off the loans faster, cutting down on interest charges. It can also save you thousands over the life of your loan.

For example, say you had $35,000 in student loans with an interest rate of 6.31% (the current rate for Grad PLUS loans) and a minimum monthly payment of $400 a month. Now, take the average $1,977 you would save by moving to a state without income tax and divide it up over 12 months. That would give you an extra $165 in your pocket each month. If you put that additional amount toward your student loans, you could pay off your debt about three and a half years early and save more than $4,500 in interest.

Other Costs

Before packing up and moving to a new state, consider other costs that may eat into your savings. Between putting down a deposit on a new apartment, moving your belongings and registering your vehicle in a new state, you can spend thousands.

In addition, some states with no income tax make up their revenue through other means, such as sales tax. Florida has a 6% sales tax on goods and services, including essentials such as clothing or food. If you’re not used to paying taxes on groceries, the added sales tax can put a dent in your budget. That’s why it’s important to compare the cost of living when deciding if it’s worth it to move to a new state.

Moving to Save Money

Depending on your circumstances, moving to a state with no income tax can give you a substantial savings. You can use that money to pay off your student loans faster, boost your emergency fund or catch up on retirement savings. But before you make the leap, be sure you understand the added expenses of moving so your decision is financially sound.

Image: xavierarnau

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File Taxes Jointly or Separately: What to Do When You’re Married with Student Loans

Married couples with student loans must make a difficult decision when they file their tax returns. They can choose to file jointly, which often leads to a lower tax bill. Or they can file separately, which may result in a higher tax bill, but smaller student loan payments. So which decision will save the most money?

First, let’s discuss the difference between the two filing statuses available to married couples.

Married filing jointly

Married couples always have the option to file jointly. In most cases, this filing status results in a lower tax bill. The IRS strongly encourages couples to file joint returns by extending several tax breaks to joint filers, including a larger standard deduction and higher income thresholds for certain taxes and deductions.

Married filing separately

Because married couples are not required to file jointly, they can choose to file separately, where each spouse is taxed separately on the income he or she earned. However, this filing status typically results in a higher tax rate and the loss of certain deductions and credits. However, if one or both of the spouses have student loans with income-based repayment plans, filing separately could be beneficial if it results in lower student loan payments.

For help figuring out which filing status is better for married couples with student loans, we reached out to Mark Kantrowitz, publisher and Vice President of Strategy at Cappex.com. Kantrowitz knows quite a bit about student loans and taxes. He’s testified before Congress and federal and state agencies on several occasions, including testimony before the Senate Banking Committee that led to the passage of the Ensuring Continued Access to Student Loans Act of 2008. He’s also written 11 books, including four bestsellers about scholarships, the FAFSA, and student financial aid.

Two Advantages to Filing Taxes Jointly:

  • Most education benefits are available only if married taxpayers file a joint return. This can affect the American opportunity tax credit, the lifetime learning credit, the tuition and fees deduction (which Congress let expire as of January 1, 2017, but is still available for 2016 returns), and the student loan interest deduction.
  • Couples taking the maximum student loan interest deduction of $2,500 in a 25% tax bracket would save $625 in taxes. But this “above the line” deduction also reduces Adjusted Gross Income (AGI), which could yield additional tax benefits (e.g., greater benefits for deductions that are phased out based on AGI, lower thresholds for certain itemized deductions such as medical expenses, and miscellaneous itemized deductions).

However, there is a potential downside to filing jointly for couples with student loans.

Income-driven repayment plans use your income to determine your minimum monthly payment. Generally, your payment amount under an income-based repayment plan is a percentage of your discretionary income (the difference between your AGI and 150% of the poverty guideline amount for your state of residence and family size, divided by 12).

  • If you are a new borrower on or after July 1, 2014, payments are generally limited to 10% of your discretionary income but never more than the 10-year Standard Repayment Plan amount.
  • If you are not a new borrower on or after July 1, 2014, payments are generally limited to 15% of your discretionary income, but never more than the 10-year Standard Repayment Plan amount.

Because filing jointly will increase your discretionary income if your spouse is also earning money, your required student loan payment will typically increase as well. In some cases, the difference is negligible; in others, this can add up to a pretty significant cost difference.

“Calculating the trade-offs of income-driven repayment plans versus the student loan interest deduction and other benefits is challenging,” Kantrowitz says, “in part because the monthly payment under income-driven repayment depends on the borrower’s future income trajectory and inflation, not just the inclusion/exclusion of spousal income.”

Fortunately, some tools can help you run the numbers.

An example: Meet Joe and Sally

Here’s a simple scenario that shows how a change in filing status can save on taxes but cost more on student loans:

  • Joe and Sally are married with no children.
  • They live in Florida (no state income tax).
  • Joe is making $35,000 per year and has $15,000 of student loan debt with a 6.8% interest rate.
  • Sally is making $75,000 per year and has $60,000 of student loan debt with a 6.8% interest rate.

First, we can estimate Joe and Sally’s tax liability for filing jointly versus separately. TurboTax’s TaxCaster tool makes this pretty easy. Here’s what we get when run their numbers using 2016 tax rates:

  • Filing jointly, Joe and Sally would owe $13,249 in federal taxes.
  • Filing separately, they would owe $15,178.

So they would save just over $1,900 in federal taxes by filing jointly. But how would filing jointly affect their student loan payments?

We can use a student loan repayment estimator like the one provided by the office of Federal Student Aid to find out. Here’s what we get when we run the numbers and choose the Income-Based Repayment option, assuming they are new borrowers on or after July 1, 2014:

  • Filing jointly, Joe’s minimum required monthly student loan payment under a standard repayment plan would be $143, and Sally’s would be $571, for a total of $714 per month.
  • Filing separately, Joe’s minimum required monthly student loan payment would be $141, and Sally’s would be $474, for a total of $615 per month.

Over the course of a year, Joe and Sally would only save $1,188 on their student loan payments by filing separately. Even with the additional loan payments they would have to make, filing jointly would save them $712 more than filing separately.

What’s best for your situation?

Every situation is different. The simple example above comes out in favor of filing jointly, but you will need to run your own numbers to figure out what is right for you. Here are additional tips to help you figure it out:

  1. Know how much you owe. Make a list of all loan balances, interest rates, and the type of each student loan you have. You can find your federal student loans on the National Student Loan Data System. You can find information on your private student loans by looking at a recent statement.
  2. Estimate your student loan payment options. Using a student loan repayment estimator like the one mentioned above, determine your required payments when filing separately versus jointly.
  3. Calculate your tax liability. Use a tool like TurboTax’s TaxCaster or 1040.com’s Free Tax Calculator to calculate your federal and state tax liability when filing separately versus jointly.
  4. Be aware of long-term consequences. Filing separately might result in lower monthly payments today but more interest paid over time. If you make it to the 20- or 25-year forgiveness point, that could have tax implications down the line. Kantrowitz points out that “forgiveness is taxable under current law, causing a smaller tax debt to substitute for education debt. The main exception is borrowers who will qualify for public student loan forgiveness, which occurs after 10 years and is tax-free under current law.” Keep those long-term consequences in mind as you make a decision.
  5. Consider steps to lower your AGI. Your eligibility for income-driven student loan repayment plans depends on your AGI, which is essentially your total income minus certain deductions. You can reduce this number, and potentially lower both your tax bill and your required student loan payment, by doing things like contributing to a 401(k), IRA, or Health Savings Account.
  6. Keep the big picture in mind. These decisions are just one part of your overall financial situation. Keep your eyes on your big long-term goals and make your decision based on what helps you reach those goals fastest.

Other unique situations

There are a few unique situations that make deciding whether to file jointly or separately a little more complicated. Do any of these situations apply to you?

Divorce and legal separation

Sometimes, determining marital status to file tax returns isn’t cut and dried. What happens when you and your spouse are separated or going through a divorce at year end? In this case, your filing status depends on your marital status on the last day of the tax year.

You are considered married if you are separated but haven’t obtained a final decree of divorce or separate maintenance agreement by the last day of the tax year. In this case, you can choose to file married filing jointly or married filing separately.

You and your spouse are considered unmarried for the entire year if you obtained a final decree of divorce or are legally separated under a separate maintenance agreement by the last day of the tax year. You must follow your state tax law to determine if you are divorced or legally separated. In this case, your filing status would be single or head of household.

Pay as You Earn repayment plans

Pay as You Earn (PAYE) is a repayment plan with monthly payments that are limited to 10% of your discretionary income. To qualify and to continue to make income-based payments under this plan, you must have a partial financial hardship and have borrowed your first federal student loan after October 1, 2007. Kantrowitz says the PAYE plan bases repayment on the combined income of married couples, regardless of tax filing status.

Unpaid taxes, child support, or defaulted federal student loans

If you or your spouse have unpaid back taxes, child support, or defaulted federal student loans, joint income tax refunds may be diverted to pay for those items through the Treasury Offset Program. “Spouses can appeal to retain their share of the federal income tax refund,” Kantrowitz says, “but it is simpler if they file separate returns.”

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I Got an Airline Voucher for Being Bumped. Do I Owe Taxes?

Bigger payouts from the airlines could get a review from the IRS. Here's what a tax expert has to say.

Unless you’ve been living under a rock the last month, chances are you heard about the passenger-crew-police altercation on a United Airlines flight that led to a passenger being dragged off the plane to make room for a United employee.

You probably also heard about United’s ensuing policy changes that will hopefully keep such an altercation from happening again, particularly the airline’s decision to increase the amount it will offer passengers who volunteer to be “bumped” from their flight.

That new amount is $10,000, and while it’s highly unlikely you’ll ever be offered that big a payout, you might be wondering what, if any, tax consequences would arise from that kind of cha-ching moment.

First off, it’s important to note that you’re probably never going to get cash for voluntarily agreeing to take another flight, so there’s no big shopping spree in your future. Any compensation is probably going to be a voucher for future flights and services. Quick note: If you are involuntarily bumped, the Department of Transportation requires the airline give you a check instead of a voucher if you request it. Such a payment likely would not have tax consequences. (Your airline credit card may help keep you from getting bumped. And if you’re ditching United altogether, here are four airline credit card alternatives.)

We talked to Mark Luscombe, principal federal tax analyst with Wolters Kluwer Tax & Accounting, about some of the possible tax consequences you should keep in mind in the unlikely case you get a $2,000, $5,000 or even $10,000 payout from an airline.

To Tax, Or Not to Tax. Is That Even a Question?

“You start off with the problem that, in general, anything that’s received in the way of compensation or payments are taxable unless you can find an exclusion in the tax code for them,” Luscombe said. “There’s no specific exclusion for this, and the IRS has not really directly addressed the issue, so you have to sort of analyze by analogy.”

In doing so, most people agree that things like airline vouchers probably aren’t taxable, Luscombe said. That’s based in large part on an advice memorandum to an airline about a decade ago outlining how the airline should handle these voucher payments for their own, internal accounting processes.

“In that memorandum, the IRS basically took the position that the airline could not defer part of their income for selling the ticket contingent on whether a possible voucher is ultimately used,” he said. “[The IRS] viewed it as what the passenger is really paying for. Their initial ticket is a whole package of services.”

Luscombe suggested that, because the IRS views the vouchers as part of the original transaction and doesn’t allow the airline to defer income (basically, claiming it as a liability on their books) for those vouchers, they likewise would not see them as income for a passenger, but rather the airline holding up its end of the contractual agreement between the passenger and airline.

So, in a nutshell, it’s unlikely the IRS would seek taxes for your voucher. However, the increased payout amounts airlines are now offering that total thousands of dollars do have the potential to make the IRS take a second look, Luscombe said.

The vouchers can be considered somewhat similar to an insurance payout. Say, for example, your house catches fire and your insurance pays you to take care of the damages. Those payments are, generally speaking, not taxable under the tax code. “But they can be taxable if the recovery is viewed as excess in some way,” Luscombe said.

So, could the same be true for a $10,000 airline voucher?

“You do get into the issue here when you’re talking about $10,000 as to whether the IRS might take another look at this and say, ‘well, this has moved into a new realm,’” he said, and could potentially reconsider whether these payouts for being bumped are considered “excess.”

While a $10,000 voucher for getting bumped from your first-class trip from New York to London probably wouldn’t be considered excessive, that same voucher for your coach-class trip from Los Angeles to Albuquerque possibly could. So, if you receive a voucher in an amount that is worth significantly more than you paid for your original ticket, it’s wise to play it safe and talk to a tax pro about whether you need to declare it on your tax return.

“If more dollars are getting involved here, then it’s possible the IRS will decide to address it, so it’s probably always a good idea to check with your tax professional about what the current state of the law is,” Luscombe said.

Remember, being truthful and accurate on your tax return can save you a lot of headaches, including the possibility of being audited by the IRS. If you’re unclear about something, it’s always best to reach out to a professional for guidance. Most importantly, whatever you do, don’t avoid paying your taxes. It can result in serious fines, potential jail time and can wreck your credit.

Image: GlobalStock

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What Airbnb’s Hotel Tax Means for Guests & Hosts

Here's what to expect, how to avoid problems and how to keep the tax man happy.

The summer travel season is nearly upon us and if you’re a fan of staying with Airbnb hosts instead of hotels, you probably already know some locations charge some or all of the same taxes that hotels charge.

If you don’t already know that, surprise! The number of locations charging taxes for that spare room or whole house is only growing. Beginning May 1, Texas will join 30 other states where taxes are charged at either the local or state level or a combination of both.

Clearly, there’s a financial benefit for the communities levying these taxes. The Dallas Morning News estimates Airbnb would’ve remitted an estimated $8 million in Texas state taxes in 2016. However, it’s not the states and cities that initiated the effort. For that, you can thank the hotel industry, which has been lobbying hard for the taxes.

Why?

“Airbnb has brought hotel pricing down in many places during holidays, conventions and other big events when room rates should be at their highest and the industry generates a significant portion of its profits,” Vijay Dandapani, chief executive of the Hotel Association of New York City, told The New York Times in a recent article.

While Airbnb has said on its website it is happy to collect its fair share of taxes, there’s clearly some negative feelings about how it’s all gone down.

“The hotel hypocrisy is almost unbelievable,” Nick Papas, a spokesman for Airbnb, said in an email. “The hotel cartel wanted Airbnb to collect taxes and when we implemented a way to do so, they changed their position and lobbied cities to leave millions of dollars on the table.”

The continuing fight has led to a variety of tax schemes across states and municipalities, creating a confusing landscape for hosts and guests.

What It Means for Airbnb Hosts & Guests

For Hosts

If you’re considering becoming a host, be aware that the taxes present some confusion for some people renting out their spaces.

The reasons are numerous and varied. To start, no one really likes paying taxes. But additional layers of frustration can come with the Airbnb taxes. They can be levied and remitted in different ways depending on the tax laws in particular states or municipalities and Airbnb’s agreement with those entities. Then there are the host’s options of how to charge guests once taxes are implemented. Many hosts get confused when it comes to collecting the tax, where to note it on the listing and the bookkeeping process.

Jeff Cook, who owns several properties in Pennsylvania, said sales and use taxes were already in place when he started hosting with Airbnb several years ago. “The biggest issue here is that many people weren’t paying it simply because they didn’t think they had to,” he said. “I paid it from the get-go, because I wanted my business to be legitimate.”

But it wasn’t easy. Cook’s price for guests bakes in the 6% state and 3% local tax, so he doesn’t note it on his site and doesn’t have to worry about asking for local taxes when guests arrive. His revenue is submitted to Airbnb, but then it gets a little complicated.

Airbnb removes their 9% fee and sends him the remainder, he said. “And then I have to figure out what the tax amounts are independently. If something could be done better … perhaps if they distinguished between the tax and the regular revenue that would be helpful. The lump sum is sent to me, I figure out what the correct tax amounts are, and then I submit a return and payment to the appropriate authorities.”

Laura Jesse, a host in San Antonio, said she’s ambivalent about the tax that begins in Texas next week. “I live near projects that were funded in part with the [state’s occupancy] tax,” she said. “I get a fair amount of convention business as I live near downtown, etc.”

As for raising her rates to offset the taxes, Jesse said she has no plans to do so at this time.

Of course, taxes aren’t the only costs Airbnb hosts face. Check out a few others. But the spare money can still help you do things like pay off debt (you can see how your debt affects your credit with a credit report snapshot on Credit.com). It’s also good to keep in mind that many of the expenses involved with renting out your space are tax-deductible. See which ones you can write off here.

For Guests

Taxes mean your stays are probably costing more – anywhere from 3% to 15% depending on locale and host. On top of that, the process can become confusing depending on how the host applies those taxes to your bill.

Airbnb addresses how that can be done on its Airbnb Citizen site, but there are no clear-cut guidelines available, so many hosts are left scratching their heads and conferring with other hosts on how they alert guests and even charge them.

Airbnb offers guidance thusly:

“If you determine that you need to collect tax, you can usually either add it within a Special Offer or ask your guests to pay it in person. In each case, it’s important that guests are informed of the exact tax amount prior to booking. If you choose to collect tax outside of your listing’s rates, please note that it should be collected only upon arrival and that we are unable to assist with collection.”

So, if your host suddenly asks you to hand over a little cash to cover the taxes, it’s probably not a scam. As Airbnb explains on its site, “this needs to be clearly stated on the listing prior to booking.” So, if the host can’t show you where that’s stated, you should be wary.

Hopefully, however, most hosts will bake in the taxes like Cook does, and you will see only a price increase at your favorite Airbnb homes. (Travel often? These travel rewards credit cards could be right for you.)

“I think separating taxes as a line item [on guest bills] would help clarify the issue for people,” Cook said. “I’m a big supporter of Airbnb. I think they are an awesome company, and as they evolve and grow, distinguishing tax through line items would be beneficial to everyone.”

Image: PeopleImages

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Stuck With a Huge Tax Bill? Here’s How to Deal

Here's what to do if you're facing down a big payment to Uncle Sam.

This year I owe quite a bit of money in taxes.

This amount (let’s call it “in the many thousands”) doesn’t come as a complete surprise since I made more cash last year than I did the year before, but still, it’s a large amount. As a freelancer I’ve learned to sock away 30% to 40% of each paycheck into a savings account set aside for taxes, so I’ll be OK to pay it. Other people might not be so lucky when Uncle Sam comes calling. A recent survey by the Federal Reserve found that 31% of people couldn’t even pay for a $400 emergency expense and 28% said they would need to borrow that money from friends or family

Luckily there are a few things you can do if you’re saddled with a tax bill you can’t pay.

1. Start at the Source

If you can’t pay your tax bill in full come April, fear not — you won’t be thrown in jail. (At least not yet!) The IRS offers a few ways to potentially alleviate the sticker shock. You could apply for an online payment agreement that allows you to pay your tax liability over time, or you could work with the IRS to settle for less than the full amount owed. That’s called an Offer in Compromise, and you can learn more about it — and if you qualify — here.

2. Ask to Have Your Penalties Reduced

Under certain circumstances — as in you or your spouse dealt with a serious illness last year or had an unusual tax event — the IRS has been known to work with taxpayers to waive certain penalties. Try writing a letter to explain the situation in detail, and be sure to specifically ask for an abatement. It’s worth a try.

3. Consider a Loan

If you’re in good financial standing otherwise, a personal loan through your bank with a decent interest rate could help you pay off a large tax bill right away. A better credit score will help secure a lower interest rate. You can view two of your scores for free on Credit.com.

4. Take out a HELOC 

A HELOC — or home equity line of credit — often offers interest rates that are lower than credit cards or potentially even personal loans, plus your interest could be tax deductible. The downside is that defaulting could mean losing your home — not something to take lightly. Be sure you know what you’re getting into before taking this course of action — learn more about it here.

5. Put It on Your Credit Card

While it should only come as a last resort, paying your bill on a credit card allows you to pay your debt on time (at least as far as the government is concerned), while giving you some time to pay it off in full on your credit card. If this is the way you’ll pay your taxes, it’s worth researching credit cards with 0% APR introductory offers that can allow you to take your time paying off the bill without paying interest. Keep in mind there will be an additional fee — which could be quite substantial, depending on how much you owe.

Whatever option you take, be sure to research all the options before jumping in to understand which one is best for your financial situation.

Image: jacoblund

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The Average Property Taxes in All 50 States & D.C.

A comparison of property taxes across all 50 states and Washington, D.C.

Image: JamesBrey

 

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What is a Required Minimum Distribution?

For workers or retirees who have not begun to withdraw funds from their retirement accounts by age 70½, the IRS requires that they start withdrawing funds. The RMD requirement applies to all tax advantaged retirement accounts, from traditional IRAs and 401(k)s to 403(b)s and SEP IRAs. The RMD does not apply to Roth IRAs or Roth 401(k)s.

Here’s a full list of retirement accounts subject to the RMD rule:

  • Traditional IRAs
  • SEP IRAs
  • SIMPLE IRAs
  • 401(k)s
  • 403(b)s
  • 457(b)s
  • profit-sharing plans
  • other defined contribution plans

How do I figure out how much to withdraw?

Just like filing your taxes, it falls on your shoulders to remember to take the RMD once you reach 70½. You can do the math yourself (we’ll explain below) to figure out what your required minimum distribution will be, or you can ask for help from a tax professional or financial adviser.

To calculate your RMD, you need to know exactly how much you’ve got saved up in each account as of Dec. 31 of the previous year. Next, use this table from the IRS to find your “distribution period” score, which is based on your life expectancy.

Most people can calculate their RMD by dividing their total retirement account balances by the distribution period that corresponds with their age.

Let’s say you turned 70½ in Dec. 2016 and had a balance of $1 million in your eligible retirement accounts on Dec. 31. You would then find the distribution period that corresponds to your age in Table III.

According to the table, your distribution period number is 27.4. When you divide $1 million by 27.4, you get an RMD of $36,496.35. That is the minimum withdrawal you must make from that account by April 1, 2017.

When do I have to start taking an RMD?

If you are already retired, you are required to take distributions by April 1 of the year after you turn 70½.

If you are still working at age 70½ and you carry a traditional 401(k) or 403(b) account with your employer, you do not have to take an RMD unless you own 5% or more of the company. However, if you are still working at age 70½ and you have individual retirement accounts outside of your employer retirement account, you will need to make an RMD from those IRAs.

You do not have to take your RMD as one lump-sum payment. The IRS will allow you to take out the funds in chunks throughout the year, which allows your money to keep growing tax free. As long as the total meets the RMD for the year, you’re in the clear.

What happens if I don’t take my RMD?

If you don’t take your RMD during the year after you turn 70½, you’ll be slapped with a 50% excise tax on the amount that was not distributed when you file taxes.

For example, if your RMD was $10,000, but you only took out $5,000, you will be assessed the 50% tax on the $5,000 that you did not withdraw.

You can delay your first RMD. If you choose to do so, you’ll be required to take two in the next year, which will affect your gross income.

 

What if I don’t need to live off of the distribution?

You are required to take your RMD beginning at 70½ , but you that doesn’t mean you have to spend it.

“A lot of clients believe that they must take an RMD and spend it. In reality, all the IRS cares about is that you remove it from the account, declare it as income, and pay taxes on it,” says Riverside, Calif.- based financial planner Breanna Reish.

You are actually free to use the money however you’d like.

One way to meet your RMD requirement is by making a qualified charitable distribution paid directly from the IRA to a qualified charity. The charitable distribution can satisfy all or part of the amount you are required to take from you IRA.

What if I have multiple retirement accounts?

If you have more than one retirement account, things can get a little more complicated. You still need to take an RMD, but you don’t have to take one out of each account. You’ll need to add up the amount you have in all of your qualifying retirement accounts, then use that figure to determine your RMD using Table III.

Again, it’s probably a good idea to seek advice from a tax or financial adviser professional who can help make the wisest decision for your finances.

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Friendly Reminder: A Tax Extension Doesn’t Give You More Time to Pay

Haven't filed your taxes yet? Good news: You can get a six-month extension to do them.

Haven’t filed your taxes yet? Good news: You can get a six-month extension to do them. Bad news: You still need to pay your taxes by April 18 (this year’s deadline), or you’ll owe interest and fees for making a late payment. You have to do your best to estimate what you owe and make or postmark the payment by April 18.

How to Get an Extension to File Your Taxes

You can request an extension from the Internal Revenue Service by either submitting an electronic payment of your estimated tax due, filing an electronic Form 4868 or filing a paper Form 4868. Each option automatically gives you a six-month extension for filing your tax return, meaning you have until Oct. 18 to send in your paperwork.

To make an electronic payment to the IRS, you can make an online direct payment from your bank account, use the Electronic Federal Tax Payment System (requires enrollment) or use a credit or debit card. Making an electronic payment means you do not have to file a Form 4868, as the payment triggers an automatic six-month extension. If you file a paper Form 4868, you should include your payment.

What to Do If You Owe But Don’t Have the Money

People often want an extension from the IRS because they don’t have enough money to pay their tax bill. But that’s not how it works.

If you don’t have the cash to pay your taxes, you can make a partial payment, though the unpaid balance will be subject to interest and a late-payment penalty (generally one-half of 1% of the unpaid tax each month the balance goes unpaid, up to 25%). You could also pay your taxes with a credit card, though there’s a processing fee to do so, plus the interest you’d owe your credit card company. You can learn more about paying your taxes with a credit card here. While the IRS offers installment plans, you must file your tax return to apply for one.

Not only can paying your taxes late get expensive due to interest and fees, it could potentially damage your credit: The IRS could place a lien against your property for unpaid tax debt, which will show up on your credit report as a derogatory item. That can drive up the costs of other things in your life, like loan rates and insurance premiums. (You can see what’s affecting your credit by getting a free credit report summary every 14 days on Credit.com.)

Whether you decide to get an extension or file your tax return under deadline pressure, do your best to not rush through your work, because mistakes can cost you, too. Check out this list of 50 things to know if you haven’t filed your taxes yet.

Image: Tempura 

The post Friendly Reminder: A Tax Extension Doesn’t Give You More Time to Pay appeared first on Credit.com.

What to Do When You Owe Taxes to the IRS

Owing a debt you can’t pay is a situation nobody wants to find themselves in, and it can be especially stressful when that debt is owed to the IRS. Many people fear the IRS and not without reason.

The IRS has collection powers that many creditors don’t have, including garnishing wages, seizing bank accounts, and even putting liens on property. Yet many people occasionally face a situation where they have a tax debt they just can’t pay. There are many options for dealing with tax debt, but ignoring it and hoping it goes away is not one of them. If you find yourself in this unfortunate situation, check out these tips for facing tax debts.

Filing for a filing extension will not give you more time to pay back the debt

Some people mistakenly believe that if they extend their tax return, they’ll have additional time to pay the amount due with their return. But an extension is just an extension of time to file, not to pay. You are still obligated to calculate the amount you’ll owe and pay that by April 15, even if you’re not yet ready to file.

Pay as much of the debt as possible by the filing deadline

When you file an extension but don’t pay 90% of the tax you owe for that year, the IRS will charge a failure-to-pay penalty. The penalty is generally 0.5% per month on the balance of your unpaid balance, and it starts accruing the day after taxes are due. It can grow to as much as 25% of your unpaid taxes.

In addition, interest will accrue on any unpaid tax from the due date of the return until you pay your balance in full. The interest rate is determined quarterly and is the federal short-term rate plus 3%.

If you can’t pay the amount you owe, filing your return without making a payment won’t avoid penalties and interest, but it’s important to know that filing an extension won’t help you avoid them either. Just file on time and pay as much as you can to reduce penalty and interest charges.

Now that you’ve filed your return and know how much tax you owe, it’s time to consider your options for paying the balance due.

How to pay your tax debt

By credit card

If you don’t have the money to pay the amount due immediately, the IRS does accept credit cards, but be wary of paying your tax debt with plastic. Although the IRS doesn’t charge a fee to pay by credit card, the company that processes your payment will charge a fee ranging from 1.87% to 2.00% of the payment amount. Plus, you’ll need to consider the interest your credit card company will charge until you pay off the balance.

The IRS will charge a far lower interest rate than your credit card, which means you can pay off the debt much quicker.

Enroll in an IRS repayment plan

Paying a tax debt via credit card may not be an option if the amount due exceeds your credit limit, or it may not be the best choice if your credit card has a high interest rate. In that case, you may be able to work out a payment arrangement with the IRS. Just be aware that your account will continue to accrue penalties and interest until the balance is paid in full.

Here are three types of IRS repayment plans:

Short-term extension to pay

If the amount you owe is relatively small and you believe you can pay it off within 120 days, call the IRS and ask for a short-term extension of time to pay. This is not a formal payment plan. The IRS will just make a note on your account that you’ve been granted additional time to pay the full amount. During this period, they will not take any collection action against you.

Installment agreement

If you aren’t able to pay your debt in full within 120 days, Scott Taylor, a CPA with Piercy Bowler Taylor & Kern in Las Vegas, Nev., recommends that you contact the IRS to arrange an installment agreement. An installment agreement is basically a monthly payment plan. You can apply online for an installment agreement if you owe $50,000 or less in combined tax, penalties, and interest. For balances over that amount, you will need to complete Form 9465 and Form 433-F and send them in by mail.

With an installment agreement, you decide how much money you will pay each month and on what date you’ll make the payment. As long as your debt will be paid off within three years and you owe less than $10,000, the IRS has to accept your payment plan.

Fees

Keep in mind that the IRS also charges user fees for installment agreements. “Unfortunately for taxpayers, the fees have gone up as of January 2017,” Taylor says. The cost to set up an installment agreement is $225. If you apply online and choose to have the monthly payments directly debited from a bank account, the fee drops to $31.

If your ability to pay the agreed upon amount changes later on, you’ll need to call the IRS immediately. When you miss a payment, your agreement goes into default and the IRS can start taking collection action. For example, if your agreement calls for a $300 payment and you lose your job and aren’t able to make the payment, call the IRS before you miss a payment. They may be able to reduce your monthly payment amount to reflect your current financial situation.

Partial payment installment agreement

What if you owe so much that you can’t pay it off in a reasonable period of time? In that case, you may be eligible for a partial payment installment agreement. Like a regular installment agreement, you will make regular, agreed upon payments for a set period of time. However, the payments will not pay off the entire debt. After the agreement period ends, the remaining debt will be forgiven.

As you can imagine, the IRS doesn’t take debt forgiveness lightly, so applying for a partial payment installment agreement is more complicated than applying for a regular installment agreement. Instead of letting you decide how much you can afford to pay each month, the IRS will calculate your monthly payment by taking into account your outstanding balance, the remaining statute of limitations for collecting the debt, and the reasonable potential of collection.

To request a partial payment installment agreement, it’s best to consult a tax professional with experience handling tax debts. Before the IRS approves a partial payment installment agreement, you will need to have filed all of your tax returns and be current on your income tax withholding or estimated payments.

How to settle your tax debt (offer in compromise)

You’ve probably heard the television commercials promising to help you “settle your tax debt for pennies on the dollar.” These ads refer to an offer in compromise (OIC), and they’re not as easy to get as those ads would have you believe.

With an OIC, you agree to a lump-sum or short-term payment plan to pay off a portion of your debt in exchange for the IRS forgiving the remainder of the debt.

To qualify, you must prove that you are unable to pay off the entire debt through an installment agreement or other means. It can be difficult to meet the income and asset guidelines to qualify for an OIC, so it’s best suited for taxpayers with low income and very few assets.

You can check to see if you are eligible for an OIC by using the IRS’s pre-qualifier tool. To apply, you’ll need to complete Form 656 and Form 433-A and submit them along with an application fee of $186. You’ll also be asked to provide documentation to support the financial information provided in the forms.

Again, it’s a good idea to get help from a tax professional with experience working with OICs to help you complete the forms and walk you through the complex process. Be wary of tax resolution firms making promises that sound too good to be true. Check with the Better Business Bureau and the state attorney general’s office for complaints before you pay a retainer.

Tax debt discharge

There is a 10-year statute of limitations on tax debt collection, so if you are having serious financial issues and can’t pay at all, letting that statute run out may be an option. To do this, you’ll need to get your tax debt in currently-not-collectible (CNC) status by demonstrating that you cannot pay both reasonable living expenses and your tax debt.

To request CNC status, the IRS will ask you to provide financial information on Form 433-A or Form 433-F and provide documentation to support amounts listed on the statement. If you have any assets that the IRS believes could be sold to pay your debt, they may not grant CNC status.

While your account is in CNC status, the IRS will not pursue collection, but if you are owed any tax refunds on returns filed while your account is in CNC status, the IRS may keep your refunds and apply them to your debt. They may also file a Notice of Federal Tax Lien, which can affect your credit score and your ability to sell your property.

The IRS will review your income annually to see if your situation has improved. If you maintain CNC status until the 10-year statute of limitations runs out, you may no longer be required to make payments, regardless of whether your financial situation improves later on.

What if you don’t agree with the amount due?

If you owe a lot more than you expected, take a moment to review your completed return carefully to look for errors. Make sure you didn’t accidentally enter the same income twice or forget an important deduction, and make sure you answered all of the questions correctly. One missed question or checkbox can cause you to miss out on valuable tax benefits. Also, compare this year’s return to last year. If your tax bill went up drastically even though your situation hasn’t really changed, find out why.

Occasionally, taxpayers receive notices from the IRS indicating an amount due that they don’t agree with. Don’t feel like you have to pay an amount you don’t believe you owe just because it comes on IRS letterhead. Taylor says each notice will include a section detailing how to respond.

“The IRS may have made an error in matching up 1099s or W-2s, and the amount owed needs to be adjusted,” he says, and he recommends that you send a letter via certified mail in response, with a full explanation. “A CPA can help you with this letter, but if you follow the guidelines provided by the IRS, you should be able to respond appropriately and have the fees resolved or adjusted.”

IRS collection enforcement

If your taxes are not paid on time and you do not communicate with the IRS, they can issue a Notice of Levy. An IRS levy permits the legal seizure of your property. They may garnish your wages or seize your bank account, vehicles, real estate, or other personal property to satisfy the debt.

Taylor says IRS notices will only come via U.S. mail, so be sure you check your mail and read all IRS notices. “It seems like a simple thing,” Taylor says, “but with many financial and personal transactions occurring online, many people ignore their mailbox for long periods of time.”

Whatever your situation, Taylor says it’s important to remain in contact with the IRS to show your intent is to pay your debt. “Don’t ever ignore IRS notices,” Taylor says. “The IRS is willing to coordinate payment plans, and the consequences of ignoring them are always difficult to adjust.”

The post What to Do When You Owe Taxes to the IRS appeared first on MagnifyMoney.

11 Ways to Reduce Next Year’s Tax Bill

These are the things you can start doing right away to reduce your tax bill next year.

If you claimed the right number of dependents and standard deductions on your 2016 federal income tax return and you still ended up owing the IRS, you’re probably looking to avoid a repeat performance next year. Luckily, there are several ways to increase your chance for a refund (or at least reduce the amount you’ll owe) and you don’t have to be a tax whiz or accountant to take advantage.

Here are 11 ways you can pay less in federal taxes for your income return next year.

1. Contribute to a 401K or IRA

Contributing to a retirement fund is an important way to ensure financial independence in your golden years, but it can also convey short-term tax benefits. In most cases, the contributions you make to your 401K and IRA plans are tax-deductible and are not included in your taxable income at the end of the year. (Note: If you didn’t contribute to an IRA in 2016, you still have time. You have until April 18 to contribute up to the maximum amount and shave off a good chunk of your tax bill. Filed your taxes already? That’s OK. You can file an amended return to reflect the contribution.)

2. Buy a Home

There’s a distinct tax benefit to home ownership. The interest you pay on your mortgage is tax-deductible, and the interest is front-loaded. For the first several years, most of your mortgage payment goes toward interest, which will drastically reduce your adjusted gross income at tax time. Want an extra boost for your taxes next year? Consider paying January 2018’s mortgage payment in December to get a tax benefit before the end of the year.

3. Donate to Charity or Volunteer

You probably know charitable donations can be itemized and deducted from your income, so you’ll want to save receipts anytime you donate cash or items to charity. You can even deduct miles you travel for volunteering or other charity work.

“Miles you travel on behalf of a charity are deductible at 14 cents per mile for 2017,” said Gail Rosen, CPA.

4. Start a Home Business

Starting a home business can provide you with a new source of income and allow you to take deductions off any income the business generates.

These deductions include business costs you incur throughout the year, a portion of your mortgage and utilities if you use a home office and the cost of goods needed to keep your business running. You can even deduct startup costs.

“Any expenses that are incurred before the first sale are ‘start-up costs,’” Rosen said. “These costs cannot be deducted until the first sale. Then they are deducted over 15 years and you can deduct the first $5,000 in the first year.”

5. Search for a New Job

If you hunt for a new job in your field this year, you can write off some qualifying expenses as you search. There are exceptions, but potential write-offs include things like clothes or travel.

“If you looked for a new job in 2017, you should be aware of the income tax deduction that may be available with respect to job-search costs,” Rosen said. “Qualifying expenses are deductible even if they do not result in a new job being offered or accepted.”

6. Open a Flexible Spending Plan

Many employers offer flexible spending plans that let you contribute toward yearly medical expenses pre-tax. These contributions typically don’t count toward your taxable income.

7. Deduct Medical or Dental Expenses

Many medical and dental expenses are tax-deductible. According to Rosen, the cost of getting to and from medical treatment is deductible at 17 cents per mile, plus the cost of tolls and parking, and dependent expenses are also deductible.

“If you cover the medical cost of dependents, these can be deducted. Additionally, if you are covering the costs of an individual who would qualify as your dependent except that they have too much gross income — for example, an elderly parent — you may be able to deduct these costs as well,” said Rosen.

8. Education-Related Expenses

Current and former students have many eligible deductions and credits related to their education expenses. Paid student loan interest and tuition and fees can be claimed as deductions. Eligible current students can also access the American Opportunity Credit, which can cover up to $2,500 annually for four years, and the Lifetime Learning Credit, which can cover up to $2,000 per tax return.

9. Install Solar Energy

Homeowners who install solar energy systems in their home can get back tax credits at up to 30% of the cost of installation. This credit will begin to decrease after 2019 so you may want to act soon if you’re planning on installing solar panels.

As an added bonus, solar energy can significantly reduce your energy bills.

10. Hunt Down Every Available Tax Credit

We’ve named several tax credits above, but there are more, including credits for adopting children, the cost of child care and low-income households. Tax credits are more valuable than deductions, as they reduce your taxable income on a dollar-for-dollar basis, so make sure you’re taking advantage of every option.

11. Get a Pro to Do Your Taxes

No matter how much research you do, a professional may be able to identify tax deductions and credits that hadn’t occurred to you. Paying a reputable professional you trust can help you stay organized and minimize your tax liability. Here’s a handy guide to finding the right tax professional for your needs.

Image: courtneyk 

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