Monday, July 17, 2017

How do I pay my taxes?

So you have prepared your taxes and determined that you have a balance due, what do you do next? A question that we receive a lot in the office is: How can I make the payment for the balance due on my income taxes?  What are the options if I can't make a full payment?

The first recommendation when you have a balance due, to either the IRS or a state agency, is to pay that balance by the due date or as soon as possible after that to either avoid or reduce late payment penalty and interest on the balance. 

What are available payment options for paying in full?

You can pay by remitting a check or money order payable to the United States Treasury for balances due on your Federal taxes or a check payable to the state taxing authority (for AZ that would be Arizona Department of Revenue).  As I joke with some of our clients, paying via check is starting to go the way of the dodo bird, not very common anymore.  

Another alternative is to have the amount debited from your account.  This can be done at the time of filing, if requested when electronically filing the tax return.  Other options to pay via debit include setting up a debit via IRS' Direct Pay or for AZ it can be done at Make A Payment.  After entering information about the payment request, you will be prompted to enter the bank information and schedule the payment date.  If you pay via bank debit through these websites, there is no additional charge by the taxing authority.

You can also pay via Debit or Credit card, plus a fee that is added to the balance to be paid.  To initiate the payment to the IRS, you can go to IRS webpage Pay by credit or debit card.  You can then select the card processor on that webpage.  These same processors accept payments for other tax agencies (state income tax, county real estate taxes, etc.).  The fees have come down in the last year or two but it will cost an extra almost 2% to pay via credit card.  A debit card has a flat fee that is around $3 to process the payment.

If you can't pay the entire balance at one time, there are installment payment options available.  The IRS has an online payment agreement request here: Online Payment Agreement Request or you cna file a request via mail on Form 9465.  If the balance due is below certain limits (for individuals this amount is $10,000), it is almost assured that you will be approved for the payment agreement.  For larger amounts, there may be other documentation, requirements or information to be provided to demonstrate the financial need for the payment plan.  For example, the IRS may require direct debit of the payment amount, require detailed financial information with the installment agreement on Form 433-D, and in some instances the IRS may require that a lien be put in place to secure the interests of the United States.

As with all things, each situation can be unique so please contact the office to discuss how your situation may need to be dealt with.

Did you find this information helpful?  Please leave a comment if you have more questions or need something clarified.

Friday, July 7, 2017

Capital Assets, Investment Losses & Tax Treatment

Right off the bat, let me clarify that this will not be an exhaustive discussion of the topic of the tax treatment of investments in general as there are countless books, websites, radio programs, college classes and other educational opportunities devoted to the vast depth of that topic.  Instead I want to limit this to touching on the topic of capital assets and in particular the tax treatment of capital losses.

You may be asking what is a capital asset?  Almost everything you own is a capital asset as defined by the Internal Revenue Service (see here for more info), that is used for personal or investment purposes. Examples of capital assets include your personal auto, your house, a second home, stocks, bonds, mutual funds.  

Determining the type of asset is important, as there may be tax benefits for selling investment assets at a loss.  Personal items that are sold at a loss do not provide a tax benefit as there was no motive to make money or a profit on the purchase, for example your personal automobile (unlike collectors that sell cars at the Barrett Jackson's auction).

Now we have defined capital asset and let's assume that you sell that asset (stock, mutual fund, real estate), how do you determine if it was a gain or a loss on the sale?  To determine, you must determine your cost basis in the asset, this will generally be the price paid to acquire the item (plus any allowed carrying costs or other expenses that get added as basis).  You subtract that cost basis from the sale price, deduct any expenses for selling the item (commissions, for example) and the net result is either your gain or loss.

If you calculate the result and have a loss, what next?  For tax purposes, you can deduct a capital loss on your tax return up to certain limits, losses are first offset by any capital gains and then any excess is limited to $3,000 per year.  That $3,000 loss can offset any other type of income, so that is nice but what happens if you have a loss of $100,000?  The loss can be taken until used up, subject to the limits just explained (to offset other capital gains and then up to $3,000 per year).  The time expiration to these carryovers is that when you pass away, the losses are die with you.

I had a discussion recently with a colleague/client about his excessive loss carryover (he has enough losses to last a few hundred years) about strategies to use up those losses.  His potential solution was to invest in a mutual fund that has large capital gains distributions, except mutual funds treat short term capital gains as ordinary income (dividends) and not as capital gains.  So in this case, the $3,000 per year limit would still be applicable.  My suggestion was an investment partnership that would report short term and long term capital gains in a way that would allow for the offset against capital loss carryovers.  I am hoping that he can find a investment that would allow for this treatment.

Do you have tax questions about investment income?  Please shoot me any questions or comments.