Millions of taxpayers are afraid about the fiscal cliff of tax hikes scheduled to happen at the beginning of next year. What many of those people don't realize, though, is that some big tax increases have already taken effect this year. And without Congress moving quickly to take action, those hikes could add thousands to your tax bill come next April.
Earlier this month, right before taking off for a five-week vacation, the Senate Finance Committee passed a bill that potentially would get struggling taxpayers off the hook. But skeptics note that the bill, as written, has little chance of getting through the House of Representatives, and in an election year, every attempt at progress is likely to face stiff opposition.
When a 'Millionaire's Tax' Hits the Middle Class
The biggest threat to many taxpayers is the alternative minimum tax. The AMT was initially created to make sure that ultra-rich Americans paid at least a minimum amount of tax every year, rather than using deductions and other loopholes to avoid paying any tax at all.
But over the years, the AMT increasingly has snared more workers, including some people who are squarely in the middle class. In particular, people who live in states that impose high income and property taxes could easily find themselves stuck with a bigger bill thanks to the AMT.
The big problem with the AMT is that it's not indexed for inflation. As a result, Congress has to revisit the issue every year. This time around, it didn't bother taking care of the problem before 2012 began, which could potentially add as much as $8,000 to tax bills for millions of taxpayers.
Taking Care of Business
The Senate proposal would solve the problem for both 2012 and 2013, raising the AMT exemption from $45,000 to $78,750 for joint filers in 2012 and $79,850 in 2013. It would also extend some other favorable provisions, including the ability to make tax-free charitable contributions from IRAs and a deduction for qualified tuition expenses.
Can't Afford to Pay Your Taxes? You Have Options.
Tax Hikes Have Already Happened: Will Congress Help You Dodge Them?
It seems obvious, but doing a quick review of your taxes may lead to deductions or credits that you've overlooked. Some taxpayers remain confused about the Making Work Pay Credit, which was in effect for only two years -- 2009 and 2010. In 2011 and 2012, it was replaced by a reduction in payroll taxes that reduced the share employees paid in Social Security taxes to 4.2% from 6.2%. But filers don't have to report anything on their returns, since they've already received the credit in their paychecks. If you are self-employed, your self-employment tax for 2012 is 10.4%, down from the customary 12.4%.
If you're a college student or a parent of one, you may be eligible for the American Opportunity Tax Credit, which provides a credit of $2,500 to those who earn $80,000 or less ($160,000 for joint filers). The credit was set to expire in 2010 but Congress extended it through the end of 2012.
Even if you can't possibly pay what you owe immediately, make an effort to file on time anyway. There are penalties associated with failing to file on time, as well as penalties associated with failing to make payments. Don't compound your problems by incurring both.
Just because you can't write a check for the full amount today, that doesn't mean that you can't make a payment. Don't forget that the IRS will accept payment by credit card (just try to use a low-interest card if you have one -- paying your taxes with plastic is usually a bad idea). You may also be able to borrow from family members -- or take out a home equity loan. If you can finance the taxes you owe from some other source, you may have to pay interest, but you'll escape penalties from the IRS.
The IRS is more than happy to take your money over a period of time -- with accompanying penalties and interest. Painful, sure. But it's better than doing nothing. And the interest rate is actually quite low:a mere 3%. If you owe $25,000 or less in combined tax, penalties and interest, you can enter into an agreement using the IRS' online tool: the Online Payment Agreement. If you prefer to file through the mail, you can complete a federal Form 9465, Request for Installment Agreement. If you owe more than $25,000, you can't file for an agreement online: You'll have to submit the Form 9465 and a financial statement known as a federal Form 433-F.
If you have a significant financial issue that makes it impossible for you to pay your taxes now, the IRS may temporarily delay collection until your financial condition improves. This option is strictly up to the IRS -- they determine whether your condition warrants a delay. Penalties and interest will still accrue during this time, and they could put a lien on your property. However, it will give you some breathing room while you get your affairs in order.
If all else fails, you can consider an Offer in Compromise. An OIC is an agreement between you and the IRS that allows you to pay less than the full amount owed. You should be aware that the IRS has strict criteria for accepting an OIC, and there are associated costs (including a filing fee). You may want to consider retaining a tax professional to help you. Just be aware, however, that despite ads on TV claiming that your account can be settled for "pennies on the dollar," the IRS rejects most OIC applications, especially if they believe they can otherwise collect from you.
No matter which option you choose, don't ignore your tax obligations. They won't go away and will likely get worse, resulting in tax liens on your property or garnishment of wages. And keep in mind that the IRS is a great deal more cooperative when they believe you're making an effort to resolve things on your end.
But, even though the Finance Committee approved the bill overwhelmingly, it still faces an uphill battle. A controversial provision to extend tax credits for wind energy projects could prove to be a lightning rod for debate and hold up passage.
As painful as Congress's procrastination is, there's little that taxpayers can do but wait and see what happens. As the nation's fiscal situation becomes more uncertain, you can expect situations like this to become all too common.
Say you happily filed your tax return by the end of February and were the envy of all your friends, but in June you realized you forgot to include income from last summer's freelance job. Don’t worry, all you need to do is file an amended return using Form 1040X.
If you are an online retailer and accept credit card payments over the Internet, you may also have to deal with reporting any 1099-K forms that you receive from credit card or third party processors. Accounting for these forms accurately is important to ensure that you do not pay too much or too little tax.
TaskRabbit is an online and mobile marketplace that matches users with "Taskers," the providers of personal services, such as house cleaning, gardening, running errands, doing chores, planning parties and more. It is a good way to earn income while helping others, but as a Tasker, you need to understand the tax implications of being an independent contractor.
If you itemize your deductions and anticipate including some of your medical and dental expenses, then IRS Publication 502, "Medical and Dental Expenses," can help you determine which expenses qualify in the current tax year. After you total all of your deductible medical and dental bills, you can deduct only the portion that exceeds 7.5 percent of your Adjusted Gross Income (AGI) for 2017 and 2018. For tax years after 2018, the threshold rises to 10 percent of AGI.