Filing Income Taxes Can Be Stressful

Tax Preparation ServicesIt’s often said that the winter holidays are the most stressful time of year, but I bet anyone who has to file an income tax return could easily argue against that contention. With mounting anxiety, Americans often procrastinate for weeks or months before rushing around to collect all the necessary paperwork they need to file. Finally they sit down to face the task – often unaware of which way their return will fall. Will they owe this year or get a tax refund?

 

The economic demands of our day make this season of stress even more challenging for many. With income barely meeting their needs and unexpected expenses straining an already tight budget, many people dread the thought of an additional tax bill. On the flip side is the relief felt when they find that they’ll be getting a refund check in the mail.

 

Knowing that the anxiety-inducing job of filing a tax return is inevitable simply means that postponing the task just adds to the stress. So no matter what you may expect, whether good or bad, the first step in easing the stress is to get down to business. Then, once you know the outcome, you’ll have time to decide how to ease the burden of a tax bill or the best use for a tax refund.

 

You owe the Taxman!

Taking the worst-case scenario first, finding that you owe the IRS. First off, don’t panic even if the amount is beyond your ability to pay within the 10 days allotted after the IRS has made the assessment of what you owe. You need to be proactive in finding a solution while protecting your assets. No one will come to arrest you, but you will begin to get threatening notices before you’ll be contacted by a revenue officer. Quick action will help prevent the harassment and additional penalties and interest.

 

The first question to ask is whether you actually owe the money. A simple mathematical error can mean the difference between a refund and a tax bill. Thoroughly review the forms you filed for discrepancies. Better yet, pay a professional tax preparer to go over your returns again. If you discover that you definitely owe the IRS, you have multiple options to repay. Some will reduce the net amount owed; others will increase your overall payout.

 

An installment plan is the option used by taxpayers who owe less than $25,000. Fill out IRS Form 9465, a straight forward, form used to request a monthly payment plan. Provide the total amount you owe, how much you are able to apply to the tax bill right now and the amount you can pay each month. The IRS then can adjust the agreement or offer other arrangements.

 

Other options for taxpayers who owe money include account receivable and bank levies, wage garnishment, penalty abatement and what’s called an ‘offer in compromise’ which lowers the amount owed. However you decide to address your obligation to the IRS, the sooner you pay it off, the less you’ll pay in interest and penalties.

 

Whoopee! A Refund!

While celebrating may be overkill, taxpayers who are getting a tax refund can breathe a sigh of relief for dodging a tax bill. They now have an opportunity to make wise use of a tax windfall.

 

  • Invest/Save: One of the most fiscally responsible uses would be to deposit it into a 401k or other investment fund that earns interest.
  • Pay off Debt: While increasing your investment accounts has obvious benefits, the decision to pay down debt is a stress reliever for anyone who carries a balance. Lower debt has the potential to move your credit score in a positive direction making future borrowing easier.

 

Experiencing less stress during tax season comes when you pursue excellent financial management all year long. Avoid becoming overwhelmed by consistently burning the midnight oil and sacrificing entire weekends to work. Focus on balancing work and your private life. Set financial goals and celebrate milestones.

 

ROTH or Traditional IRA: Which Is Best?

Roth vs IRAWhat makes the most sense for you, staying with a regular individual retirement account or converting to a Roth IRA? This is not a simple question so there is no simple answer. But here are some things to ask yourself.

 

An individual retirement account is a great retirement savings tool for most individuals. Created by the federal government, IRAs are funded during your working years.  In your retirement, IRAs may help supplement your Social Security benefits.

 

Your retirement savings begin with your annual IRA contribution. If you are under age 50, the current maximum annual contribution amount is $5,500, according to the Internal Revenue Service.  For those 50 years and older, you can contribute an additional $1,000. So if you turn 50 this year, you are now eligible to contribute $6,500. The contribution amounts are adjusted for inflation each year by the federal government.

 

With a traditional IRA, you put money away and deduct it until you withdraw from the account in your retirement. You pay tax on withdrawals. Converting to a Roth IRA means you pay tax on your old account up from it, and from then on the account grows tax-free. Opening a Roth without converting is done with after-tax dollars, meaning you already paid the government.

 

 

To find out which of the two types, traditional or Roth, is best suited for you, here’s a quick way to weigh the pros and cons of each.

 

The advantages to a traditional deductible IRA:

 

Tax Deductible.  Your contribution is deductible on your federal income tax return for the year in which you contribute.

 

Tax-Deferred Growth.  Your contribution grows tax deferred until you withdraw the money. This means you do not pay any taxes while your money is growing.

 

Limitations to a traditional deductible IRA:

 

Adjusted gross income (AGI) limitations.  The amount you can deduct is limited based on your AGI and, if you participate in your employer sponsored retirement plans. Your contribution may be fully deducted on your income taxes, partially deducted or not deductible at all.

 

10% Penalty.  This is imposed to encourage IRA owners to keep their money in their retirement account until reaching age 59 ½. If you withdraw any of your money prior to then, you incur the 10% penalty on the amount you withdraw. There are some exceptions to the rule: educational expenses, first-time home purchase and certain medical expenses.

 

Advantages to a Roth IRA:

 

Avoid taxes in the future. Roth IRAs grow tax-free. Therefore, no taxes are due when you withdraw your money.

No Required Minimum Distributions (RMD).  Roth IRAs do not require RMDs after age 70 ½, so your money can continue to grow with the potential for larger dollar amounts to leave to heirs.

 

Limitations to a Roth IRA:

 

AGI limitations.  For high wage earners (2017 limits – single filing over $133,000 and married filing jointly over $194,000), Roth contributions are not allowed.

 

Disqualified distributions. The earnings in your Roth must remain in the account for five years (known as the five-year clock) and until you reach 59 ½ years. A 10% penalty is applied to earning distributions that do not meet these requirements.

 

Always consult a financial advisor or IRS publication 590 before you make your final IRA decision. Making the correct IRA choice now can benefit you down the road in your retirement.

Kimberly J. Howard,CFP

KJH Financial Services