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Posts Tagged ‘Taxes’

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I’m sorry to hear about your bitter divorce and the financial problems you’ve been experiencing. I sympatize with you on both fronts – having been through both ordeals myself. Moreover, I also know from firsthand experience – as an entrepreneur too – how difficult it is to pay those dreaded estimated quarterly taxes.

As you may know, as a self-employed individual you are obligated under the law to pay federal income tax, along with Medicare and Social Security taxes, more commonly called self-employment tax. How much you pay in federal taxes is based on your adjusted gross income. The current rate for self-employment tax is 15.3% on the first $106,800 you earn. Of course, you also have to factor in any required state and local taxes, depending on where you live.

The deadlines for filing and paying your quarterly estimated taxes are: April 15, June 15, September 15 and January 15 (or the next business if those days fall on a Saturday, Sunday or legal holiday).

If you can’t pay your quarterly taxes, don’t make the mistake of not filing at all or ignoring your situation. That will just worsen the problem. A failture to file taxes and pay what you on on time could result in late penalties and interest of 25% or more.

So if you simply don’t have the money, try one of these options:

1) Request an extension of time to pay
Extensions are usually granted for 30 to 120 days. You still get socked with penalties and interest, but they’re usually less than what you pay in an installment plan.

2) Ask for an installment agreement
With an installment agreement, you request a payment plan with the IRS for the most recent tax year. You can get a payment plan for as long as 24 months and not have it impact your credit rating, in terms of the IRS putting a lien against you or reporting you as delinquent to the credit bureaus. If you owe $25,000 or less, just go online to the IRS website and fill out the Online Payment Agreement.

3) Consider a loan to pay your tax bill
A bank loan or home equity loan (if you can get either) will carry a much lower interest rate than paying the IRS off over time under and installment agreement.

4) Ask the IRS about an offer in compromise
The IRS usually only grants these when:
a) a person can show that they have severe economic hardship; or
b) it’s doubtful that the taxpayer could pay what’s owed over the time the IRS has to collect the debt

Start by asking your accountant for which path he/she would recommend, since that individual is likely to be very familiar with your situation. Or, if you don’t use a CPA, call the IRS directly at 800-829-1040.

If you’re having trouble paying your bills on your own, yes, a debt management company can help. And contrary to popular opinion, simply enrolling in a debt management plan does not impact your credit score. Read this article on the differences between debt management and debt settlement companies, and learn why I strongly recommend debt management firms. One excellent non-profit organization is the National Foundation for Debt Management (www.NFDM.org).

Although the earnings in both types of retirement accounts grow tax-deferred, for longer-term financial planning, I like the benefits of the ROTH IRA over the Traditional IRA. Additionally, recent changes governing IRAs make it more financially advantageous to do a rollover in 2010. Lastly, since you are 50 years old and mentioned having other types of investments (bonds, CDs, retirement accounts, etc), I would seriously explore converting your Traditional IRA into a ROTH IRA. Read on for more details about why a ROTH is likely your better option.

Two major advantages of the ROTH are more control over your withdrawals and a potentially bigger nest egg at retirement. As you know, with a Traditional IRA, your contributions may be tax deductible up front (depending on your income and marital status), but you must later pay taxes on distributions.

With a ROTH IRA, you get no upfront deduction for contributions. However, your stand to get a bigger payoff on the backend – since distributions made from your ROTH IRA won’t be subjected to income taxes in retirement. This combination of tax-free growth and tax free distributions makes the ROTH IRA an especially powerful retirement account. Plus, with the ROTH IRA, you get to make contributions at any age and there’s no mandatory withdrawal age. By comparison, if you have earned income, you can only put money into a traditional IRA up until the year you turn 70 ½, and you must begin taking distributions from Traditional IRAs beginning at age 70 ½.

In 2010, IRA contribution limits for both traditional and ROTH IRAs are $5,000, plus an additional $1,000 for those 50 an older. Starting in 2010, to be eligible to contribute to a ROTH IRA, your modified adjusted gross income must be less than $177,000 for married taxpayers filing joint returns, and less than $120,000 for single taxpayers.

Also noteworthy is that as of 2010, several important changes have occurred impacting Individual Retirement Accounts. First, you no longer have to worry about whether you’re eligible to convert a Traditional IRA to a ROTH IRA due to your income level or your tax-filing status. That’s because previous rules that restricted conversions/rollovers based on income limits and filing status requirements were eliminated effective 2010.

More importantly, the financial sting of doing a rollover has been greatly reduced. In years past, a rollover was considered taxable income in the year you did the rollover. However, for any 2010 rollover from a Traditional IRA to a ROTH IRA, any amounts that would be included as income can be spaced out over two years: in equal parts in 2011 and 2012. This would effectively knock in half any tax bill generated by doing a rollover. The law also still gives you the option of including the entire amount in income in 2010. But most people doing rollovers will want the benefit of spreading that conversion income over two years and deferring taxes in the process.

When actor Wesley Snipes and stand-up comedian Sinbad were accused of owing millions in overdue taxes, they became some of the most high-profile celebrities in recent years to run afoul of the Internal Revenue Service.

But Snipes and Sinbad are hardly alone. There is actually a long history of actors, singers, athletes, entertainers and celebrities of all kinds getting chased by the tax man.

Here is a list of some high-rollers currently making news for having major tax headaches – along with a few celebrities from the past who have also endured tax troubles.

Read the rest of this post on Black Voices.com

Under section 6501(a) of the Internal Revenue Code, the IRS is required to assess tax within three years after a tax return is filed. Therefore, most people need only keep tax records for three years after filing a tax return, because that is the time period during which:
a)    a taxpayer can amend a tax return to claim a credit or refund; or
b)    the IRS can assess additional tax

As you are self-employed, however, there are a few circumstances in which you should keep records longer. Keep employment-related tax records for at least 4 years. Also, if you ever under-report income by 25% or more of the gross amount shown on your tax return, then you should keep records for at least six years after you file a return. In such as case, the IRS has six years to assess taxes – not just three. What’s more you should keep tax records indefinitely if you file a fraudulent return, or if you do not file a return at all. But I assume that these last two scenarios don’t apply to you.

According to the IRS, “the exact length of time you should keep a document depends on the action, expense or event the document records.”

The IRS further offers this guidance:

1.    You owe additional tax and situations (2), (3), and (4), below, do not apply to you; keep records for 3 years.
2.    You do not report income that you should report, and it is more than 25% of the gross income shown on your return; keep records for 6 years.
3.    You file a fraudulent return; keep records indefinitely.
4.    You do not file a return; keep records indefinitely.
5.    You file a claim for credit or refund* after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.
6.    You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years.
7.    Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

Here’s the direct link to exact page on the IRS’s website that answers the question: How long should I keep records? www.irs.gov/businesses/small/article/0,,id=98513,00.html