Tips for Staying out of Tax Debt
You probably hear it all the time: “New Year, New You.”
If you’re on the verge of becoming ridden with back tax debt, then 2015 is the year you can become and stay tax debt free.
This new year is the perfect time to alter and change your financial habits to stay free of tax debt. While financial freedom can be obtained many ways, starting with your taxes is a solid first step toward getting there. Staying tax debt free is just one of the ingredients of financial freedom that’s easier to get than you think.
Here’s a few tips for staying out of tax debt.
Don’t use (or abuse) risky tax deductions and tax credits
Just a few years ago, the IRS cracked down on abuse of the Earned Income Tax Credit. Claiming that credit incentivized some lower-income taxpayers to report more income than they actually earned. Doing so was worth more than $3,000, and its abuse was largely due to shady tax preparers. After the IRS cracked down on abuse of the EITC, these people found themselves in tax debt and one step behind financial freedom.
Claiming questionable tax deductions can also lead to tax debt. If that dinner or mileage put on your car wasn’t for a legitimate business express, then it’s probably a safe bet not to deduct it from your tax returns. If the IRS catches on, they’ll likely open your financial books, begin an audit, and then send you a bill that can lead to some serious back tax debt.
To stay debt free in 2015, better play it conservatively with the tax credits and deductions, unless you’re on solid footing with the help of a tax professional.
Pay your overseas tax debt
While it probably feels good to make money overseas, keeping it hidden from the IRS won’t bring you more riches. Instead, it’ll lead to tax debt, penalties, and interest.
In the long run, this will only decrease the riches you earned a continent away. Don’t fall victim to the trap that’s caught thousands of taxpayers in the past. Reporting overseas assets – and paying the resulting tax burden – will keep you out of the IRS’s crosshairs and stay tax debt free in 2015.
If your total overseas financial holdings exceed $50,000, you’re required to report them on Form 8938. It can be submitted with a tax return, so it’s not that hard to turn in.
If the assets are below $50,000 but exceed $10,000, they’ll probably have to be reported to the IRS via Form 114, Report of Foreign Bank and Financial Accounts. It’s known as FBAR for short, and this rule applies to taxpayers who have a financial interest in, or signature authority over, an overseas financial account.
The rules can be complicated, depending on the type of overseas financial asset. To navigate all the rules, seek a tax professional’s advice.
Enroll in an IRS Payment Plan to Pay Off Previous Back Tax Debt
If you’re unable to pay off your tax debt with a credit card – which is a good idea as it can help you avoid IRS penalties and interest – then paying through an installment plan is a practical way to go.
Paying your IRS back taxes via monthly payments doesn’t come free – there’s a small fee and an interest charge.
The fee runs $52 for people who pay via a debit method, and $120 for those who pay through a payroll deduction. The good news is that if you’re able to pay it all off within 120 days, the IRS waives the fee. More good news is that installment plans are generally approved if the back tax debt doesn’t exceed $10,000 and it’s anticipated to be paid off within three years.
Applying is easy. Just file Form 9465, Installment Agreement Request. If the tax debt exceeds $50,000, file Form 433-F Collection Information Statement as an attachment.
Staying out of tax debt in 2015 is the first step toward gaining financial freedom in 2016 and beyond. While it may be challenging to navigate all of the IRS’s rules, forms, and procedures, a tax professional can provide some valuable advice.