There used to be a time when I couldn’t wait to file my taxes. As a 20-something with little income and tons of tax deductions available (and probably the wrong withholding amount), I always received a tax refund. How things have changed.
If you’re like me, you usually owe money at tax time these days. And some years, it can be tough to come up with the money by April 15.
But what actually happens if you’re late paying your taxes? In short, a whole lotta bad stuff.
“Not paying your taxes can have painful consequences in the form of penalty fees, interest charges, federal liens, legal charges filed against you and even seizure of your property,” said Riley Adams, a certified public accountant, a senior financial analyst at Entergy and owner of personal finance blog Young and the Invested. “It’s best not to mess with Uncle Sam. He doesn’t often play nice.”
So before you think about paying late ― or worse, filing late ― learn about the potential consequences.
If you’re expecting a tax bill that you can’t afford this year, the worst thing you can do is ignore it.
What happens when you pay your taxes late?
The consequences for failing to pay your taxes by the April deadline depend on how late you are. At a minimum, though, you’ll be charged fees and interest starting the day after taxes were due.
The IRS charges a failure-to-pay penalty of 0.5 percent of the balance per month until it’s paid off. The maximum you can be charged is 25 percent of the total balance.
Interest is also charged on the outstanding balance, which is based on the federal short-term rate, plus 3 percentage points (the interest rate is subject to change).
“The interest is compounded daily, beginning with the day the tax was due, and ending the day it is paid in full,” said Christopher Jervis, president and founder of Lone Wolf Financial Services in Conyers, Georgia. “Compound interest really stinks when it is working against you.” For example, say you owed $1,000 for your 2016 return, due on April 18, 2017. “Today, it is $1,458 and climbing, due to penalties and interest,” Jervis said.
And don’t make the mistake of thinking that because you filed an extension to submit your tax return, your payment due date is also extended. If you were given an extension but expect to owe taxes, you’re required to fill out a Form 4868 and pay the estimated amount due. There is a bit of wiggle room, however; if you pay at least 90 percent of the taxes you owe with your extension request, you may not be charged the failure-to-pay penalty, assuming you pay any remaining balance by the extended due date.
The good news is that if you are late paying your taxes but set up an installment arrangement with the IRS, the monthly interest rate drops to 0.25 percent for each month the agreement is active and in good standing. It’s possible to arrange payments as low as $25 per month and terms as long as 60 months.
Related: These credits and deductions could save you thousands:
31 tax credits and deductions that could save you thousands
31 tax credits and deductions that could save you thousands
That higher standard deduction makes it difficult to put together enough charitable deductions to make it worth itemizing. But if you do make large contributions, the threshold for deductions has jumped from 50 percent of adjusted gross income to 60 percent. While it's too late to make charitable donations for 2018, Kibler suggests tracking down receipts for donations made throughout the year, especially of cash or goods. Giving to eligible nonprofits, religious organizations, and government organizations (such as a school or public library) are deductible. "If you dropped off a bag of clothing at a local charity or gave them $5 at the cash register of your grocery store, make sure to track these contributions so you get the highest tax benefit possible," Kibler says.
The passage of the Tax Cuts and Jobs Act in 2017 almost doubled the standard deduction in 2018, pushing it from $9,350 for those filing as head of household to $18,000. But it also eliminated a bunch of helpful credits and deductions, including the personal exemption, which was $4,050 in 2017.
AMERICAN OPPORTUNITY TAX CREDIT
While tuition and fees deductions have dried up, the American Opportunity Tax Credit remains an option for eligible students — not grad students or long-term undergrads; it's available only during the first four years of college — with at least half-time status at an accredited school. It covers all of the first $2,000 in expenses and 25 percent of the next $2,000 (for a total $2,500). Schools will send students a 1098-T showing the amount paid last year in tuition and fees, but even expenses including books, supplies, and equipment such as computers can be offset. If the 1098-T does not max out the allowed credit, hold onto those receipts for supplies.
LIFETIME LEARNING CREDIT
This is the tax credit for the older student. Anyone taking classes at an eligible educational institution to acquire or improve job skills is eligible, even students taking just one class well after four years of undergraduate education. There are limits: Students are credited for only 20 percent of $10,000 in expenses ($2,000 is the maximum), though it can be applied to tuition, fees, books, supplies, and equipment. Individuals with an adjustable gross income between $56,000 and $66,000 (or between $112,000 but less than $132,000 for married filing jointly), will get a reduced amount. If it's over those thresholds, you can't claim the credit at all.
MORTGAGE INTEREST DEDUCTION
If you bought a home and had the mortgage in place before Dec. 15, 2017, you are still eligible to deduct interest on up to $1 million in mortgage debt. If you happened to sign on that date or later, though, your threshold drops to $750,000.
PREMIUM TAX CREDIT
If you or your family have health insurance from a government-run marketplace built through the Affordable Care Act, you may be eligible for this credit. Income is limited to up to $48,560 for individuals and up to $100,400 for a family of four, but the credit is usually equal to the cost of the second-lowest silver plan. Taxpayers can get this credit in advance to offset monthly premium bills, but claim too much and it must be paid back when filing. Those who get too little can claim the remainder when submitting returns.
DEPENDENT CARE CREDIT
If a child does not qualify for the Child Tax Credit because they are over 17, they may still be eligible for a $500 credit under new tax laws. The credit also applies for dependents who are elderly or disabled.
CHILD TAX CREDIT
Those who took advantage of the child tax credit in 2017 could claim a $1,000 credit on their income tax return for each child under 17 who qualified. In 2018, that doubles to $2,000 per qualifying child. The credit was also nonrefundable in previous years, but can now be refunded to 15 percent of earned income over $2,500, or up to $1,400. To qualify, children have to be 16 years or younger on the last day of 2018, be related to you, claimed as a dependent, be a documented U.S. citizen or resident, have lived with you for half of the tax year (though absences related to school, vacation, military service, and medical care are exempt) and must not provide more than half of his or her own support. The credit phases out for married taxpayers filing jointly with an income of $400,000 (or $200,000 for all other taxpayers).
EARNED INCOME TAX CREDIT
The Earned Income Tax Credit is for low- and moderate-income taxpayers with "earned income" such as wages, salaries, or self-employment pay (but not Social Security, unemployment, or investment income). The limits are strict, ranging from $15,270 for a single person with no children to $54,884 for a married couple with three children or more. The credit's value is worth $519 to $6,431 depending on filing status and number of dependents, but requires recipients to have less than $3,500 in investment income for the year.
Whether it's through an employer or private plan, a traditional Individual Retirement Arrangement funded with pretax money — unlike a post-tax Roth IRA — is deductible up to a certain limit. Even if an account is opened and funded in 2019, any contributions made before the tax-filing deadline can be credited to the previous year. For 2018, the maximum contribution is $5,500 (or $6,500 for those 50 or older). There are also deduction limitations depending on the taxpayer's income and access to an employer-sponsored retirement account.
STUDENT LOAN INTEREST DEDUCTION
Students can still deduct up to $2,500 for interest paid on student loans — but get less if median adjusted gross income exceeds $65,000 ($135,000 for joint returns) and nothing if it's $80,000 or more ($165,000 or more for joint returns).
CREDIT FOR THE ELDERLY OR THE DISABLED
Taxpayers 65 or older — or younger but retired or on permanent and total disability — may be eligible for a credit. Taxable income must be below $17,500 (or $20,000 if married and filing jointly) and nontaxable Social Security, pension, or disability benefits must be below $5,000. If both partners qualify and file jointly, the income limits are $25,000 for taxable income and $7,500 for nontaxable benefits. The credit itself ranges between $3,750 and $7,000.
It isn't much, but the Savers Credit gives back to low- and moderate-income people who contribute to a qualified retirement account. Taxpayers can get a credit for 10 percent, 20 percent, or 50 percent of the first $2,000 contributed, depending on income and family size. To get the minimum 10 percent, the maximum allowed income is $31,500 for single filers, $47,250 for the head of a household, and $63,000 for joint filers. Also, beginning this year, beginning in 2018, if you're the designated beneficiary you may be eligible for a credit for contributions to your Achieving a Better Life Experience account for persons with disabilities.
A longtime friend to small-business owners and freelancers, the Simplified Employee Pension IRA offers higher contribution limits than a traditional IRA. As their own employer, business owners and freelancers can contribute up to 25 percent of their annual income or $55,000, whichever is lower. As with a traditional IRA, contributions made before the tax-filing deadline (without an extension) can be applied to the previous year.
MORTGAGE INTEREST CREDIT
Taxpayers who get a Qualified Mortgage Credit Certificate worth up to $7,500 from a local or state government may be able to claim the Mortgage Interest Credit. The home must be the taxpayer's primary residence, and interest payments can't go to a taxpayer's relative. The credit is worth up to $2,000, and unused portions may be carried forward to the following year.
MEDICAL EXPENSES DEDUCTION
You can get a larger deduction for medical expenses in 2018 by doing absolutely nothing. Until recently, taxpayers 65 years or older could deduct total medical expenses that exceeded 7.5 percent of their adjusted gross income. Even married couples that included one person 65 or older were eligible, but younger, single taxpayers could deduct only medical expenses that exceeded 10 percent of their AGI. For 2017, that threshold was slated to jump to the 10 percent of AGI for everyone, including those over 65; the recent tax reform set the threshold for everyone at 7.5 percent of gross income and made it retroactive to 2017. It stays in place for 2018, but will go back to 10 percent of AGI in 2019.
SOLO 401(K) CONTRIBUTIONS
Unfortunately, taxpayers can't just set one of these up before the tax deadline and save some cash. The one-participant 401(k), or solo or self-employed 401(k), requires you to file for a federal Employer Identification Number and set up the account by Dec. 31. But once a solo 401(k) is established, taxpayers can make contributions right up to the tax-filing date in April (or mid-October, with an extension). Total contributions can't exceed $55,000, but that's still nearly four times the maximum employee contribution to a standard 401(k) of $18,500.
If you bought new office furniture, computer servers, cranes, end loaders, cattle, trucks, or taxis for a business last year, you may be able to write off more from them than you thought. Even if you built oil derricks, warehouses, office space, or utility plants after Sept. 26, 2017, the bonus depreciation you could claim on the first year of owning those assets increased from 50 percent just a day before to 100 percent "expensing" from Sept. 27 onward. Recent tax changes also extended bonus depreciation from items bought or built new to both new and used assets. That "expensing" applies to productions (qualified film, television, and/or staged performances) and even certain fruit or nuts. The law also increased the maximum deduction from $500,000 to $1 million, with the phase-out threshold increasing from $2 million to $2.5 million.
Self-employed people can deduct 54.5 cents a mile driven for business purposes the previous year; the rate goes up to 58 cents in 2019. That said, detailed mileage logs are required. Writing down the miles driven (odometer readings at the beginning and end of the trip help), the date, the business purpose of the trip, and the destination should be adequate. Taxpayers can also take a 18-cent-per-mile deduction for eligible miles driven for medical purposes in 2018, up from 17 cents in 2017 (and it's 20 cents in 2019). The standard mileage rate for charitable activities is unchanged at 14 cents. Moving expenses, however, no longer qualify for a deduction.
HOME OFFICE DEDUCTION
This one is tricky, as simply working on the couch or at a kitchen table doesn't cut it. A home office has to be a dedicated space for working and meeting clients and customers. Furthermore, office-related utilities including telephone, internet, and even heat and electricity have to be parsed out separately. You can try to determine which portion of a home's expenses, taxes, insurance, and depreciation is dedicated to a home office; a simplified version multiplies the square feet of the room by $5 (if the total size is 300 square feet or smaller). That said, you can only get this deduction if you're self-employed: It disappeared for employees in 2018.
STATE AND LOCAL TAX DEDUCTION
Under tax changes, deductions for state and local taxes (property tax and sales or income tax) are capped at $10,000 from 2018 through 2025. If your total state and local taxes and property taxes are typically more than the $10,000, there's no way to increase the deduction. The new tax law prohibited prepaying 2018 state and local taxes that were not imposed in 2017.
You may be able to take a tax credit of up to $13,810 for qualified expenses paid to adopt a child in 2018. Those expenses include adoption fees, court costs, attorney fees, travel expenses (including amounts spent for meals and lodging), and readoption expenses for a foreign child. Those credits apply to adoptions of anyone under 18 years old or physically or mentally incapable of taking care of themselves. If your modified adjusted gross income is more than $207,140, the credit is reduced; those with MAGI of $247,140 or more can't take the credit.
If you paid or accrued income tax in a foreign country or U.S. possession in 2018, you can use it as a credit against U.S. income tax. If you already exclude foreign earned income, foreign housing costs, foreign possessions, or income from Puerto Rico exempt from U.S. tax, you aren't eligible. Also, your foreign tax credit can't be more than your U.S. tax liability multiplied against a fraction made up of taxable income from outside the United States and total taxable sources.
HOME SALE EXCLUSION
Most people who sell a home know that, if they've sold at a gain, they may exclude up to $250,000 of it if single or $500,000 if married filing jointly. Granted, you actually had to live in that home for two of the past five years (military, foreign service, and intelligence personnel are exempt). What most homeowners don't realize is that the gain isn't only on the sale price of the home, but on improvements made, real estate agent sales commissions, closing costs, recording fees, and survey fees. Kibler suggests keeping clear records of all of it in case of an audit and to keep a big chunk of the gain tax-free.
FOREIGN EARNED INCOME EXCLUSION
If you live in a foreign country for at least 330 full days out of the year, you can have up to $104,100 of your salaries, wages, professional fees, and other amounts you get as an employee excluded from federally taxable income. You may also exclude amounts your employer pays for rent, furniture rental, parking, or other items.
HSA CONTRIBUTION LIMITS
The IRS will allow taxpayers to make tax-free contributions and withdrawals from Health Savings Accounts as long as they go toward qualifying medical expenses. High-deductible health plans — with premiums ranging between $1,350 and $6,650 for singles and $2,700 and $13,300 for families — allow taxpayers to contribute up to $3,450 for single filers or $6,900 for families to HSAs without any tax implications.
NONBUSINESS ENERGY TAX CREDIT
The Nonbusiness Energy Property Credit covers materials that meet the efficiency standards of the Department of Energy. This includes home insulation, exterior doors, exterior windows and skylights, some roofing materials, electric heat pumps, various water heaters, central air conditioning, biomass stoves, furnaces, boilers, and advanced circulation fans. You can claim 10 percent of the minor improvements or 100 percent of the big ones, but you'll get only a maximum $500 credit for all years of improvements combined. It also sets credit limits for windows ($200), boilers ($150), fans ($50), and bigger jobs ($300).
RESIDENTIAL RENEWABLE ENERGY TAX CREDIT
If you're thinking about going solar, installing a small windmill, looking into geothermal heat, or experimenting with fuel cells, there's tax incentive to do so. You can get a 30 percent rebate on any of the above, but act quickly. If you don't install it by the end of 2019, the rebate drops every year until 2022.
CASUALTY, DISASTER AND THEFT LOSSES
In previous years, a taxpayer could get a deduction for any mishap that occurred in their home. But starting in 2018, the damage must have occurred during a federally declared disaster for a taxpayer to get that same deduction. This deduction may return in full in 2025, but for now it's limited to disaster areas.
The self-employed, including those with freelance income, can write off educational expenses for workshops, webinars, books, or other material that maintain or improve skills. While educational expenses to meet the minimum requirements of a trade or business — or related to getting into a new line of work — don't qualify, refresher courses, courses on current developments, and academic or vocational courses would. The deduction is the amount by which qualifying work-related expenses is greater than 2 percent of adjusted gross income.
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On the other hand, things can get hairy if you owe a lot of money and fail to pay on time. If you owe the IRS $10,000 or more, the federal government (and possibly the state as well) might put a lien on your property, according to Josh Zimmelman, owner of Westwood Tax & Consulting in Manhattan and Long Island.
“This means that if you sell your home, the government will take what they’re owed from the sales price before you can see any profits for yourself,” he said. “This could negatively affect your credit score as well because tax liens count as unpaid debts on your credit report.”
Tax levies are another possibility, in which the federal and/or local government collects the taxes you owe from various sources. “A taxpayer may see a notice of the IRS’ intent to garnish their wages ... or levy their bank account ― basically ordering your bank to empty the account and pay the IRS for you,” Jervis said.
In some instances, you could even face jail time. According to Zimmelman, you probably won’t be arrested if you don’t have enough money to pay your taxes. “But you could face jail time if you can afford to pay and just don’t, or if you fail to file at all.”
Filing taxes late is worse.
Speaking of not filing your tax return, that’s a really bad idea. Even if you don’t have the money to pay your tax bill, you should still file your return by the April deadline.
Filing your taxes late can result in a much higher failure-to-file penalty. You’ll be charged 5 percent of your unpaid taxes for every month that your return is late, up to 25 percent of the balance. For example, if you owed $1,000 in taxes, your failure-to-file penalty would be $50 per month, up to a maximum of $250. In the case that you’re subject to both a failure-to-file and failure-to-pay penalty in any given month, the maximum penalty you’ll be charged is 5 percent.
Also, if you file more than 60 days beyond the original due date or extended due date, you must pay a minimum fine of $205 or 100 percent of your unpaid taxes, whichever is smaller.
Even if you don’t file a tax return, the IRS might do it for you anyway. Since the IRS receives copies of your W-2s, 1099s and any other income-related documents, it knows how much you earned for the year. “On top of that, they often use various tools to estimate what your income should have been, regardless of what was reported to them,” Jervis said. However, when a Substitute for Return is filed, the IRS assumes a worst-case scenario ― it doesn’t consider any tax credits or deductions that might be available to you. “This means you end up getting assessed the maximum tax possible,” Jervis said.
In addition to avoiding penalties and interest, there are other reasons you should file your tax return on time. “Many options for abating penalties or reducing your tax debt are based on when things occurred,” Jervis said. “For example, there are statutory collection periods that dictate how long the IRS has to collect a tax debt. The longer you wait to file, the further into the future that deadline gets pushed.”
You could also run into trouble if you owe back taxes when trying to buy a house. The mortgage company is going to want to see copies of your tax returns to make sure the information you provided is accurate. “No return on file? No real estate closing,” Jervis said.
And again, there’s always the possibility of serving time. In fact, failure to file a return could result in one year in prison for every year you didn’t file. “If you’re found guilty of tax evasion or filing a fraudulent return, you could face five years in prison,” Zimmelman said.
Keep in mind, however, the above only applies if you’re actually required to file a tax return. Adams pointed out that not everyone needs to file taxes if their income doesn’t meet certain thresholds. For example, you don’t need to file if you earned less than the standard deduction. However, you might want to file a return even if you don’t have to in case you’re owed a refund.
If you’re expecting a tax bill that you can’t afford this year, the worst thing you can do is ignore it. The longer you wait to pay your delinquent taxes, the larger the interest and charges will be. “The IRS may be open to a tax settlement, but you have to communicate with them in order to make this happen,” Zimmelman said. So file your return no matter what, and talk to a tax professional about what to do next if needed.
Related: Find out the states with the highest income tax:
Finding a good CPA for your taxes is simple with these seven tips: 1. Ask about their specialization; 2. Verify their identification number, 3. Look up their license, 4. Consider their experience, 5. Confirm their willingness to sign, 6. Ask for advice, and 7. Determine their fees.
Congress has passed the largest piece of tax reform legislation in more than three decades. The bill went into place on January 1, 2018, which means that it will affect the taxes of most taxpayers for the 2018 tax year.