The new year often brings with it a aura of hope that comes from making resolutions and with this being the turn of a decade, you may be thinking now is the time to finally get out of tax debt. A huge tax bill, especially one you cannot fathom how to pay in full, can feel like an emotionally crushing burden. You must face the situation and find a solution.
If you have a tax liability that you cannot afford to pay, don’t avoid it. There are ways to work with the IRS. The most important thing to do is file your taxes on time, even if you cannot pay all the taxes owed. The tax attorneys at Murray Moyer, PLLC advise clients daily on how to get out of tax debt.
There are several ways to reduce the impact of unpaid taxes on your life and financial situation. If for some reason you cannot file your return on time, file an extension. The late filing penalty is 5% of the taxes owed per month (up to a maximum of 25% of the total balance). Tax debts grow rapidly so it’s important to avoid penalties whenever possible. Most taxpayers do not know that the late filing penalties are considerably higher than the penalties assessed for not paying on time. It cannot be stressed enough – file your taxes on time even if you cannot pay the amount owed.
If you have other creditors, move the IRS to the top of the list of creditors to pay off.
Tips on How to Get Out of Tax Debt in 2020:
- Assess whether your situation amounts to the type of hardship that the IRS considers serious enough to forgive a portion of the debt. This strategy takes place under an Offer in Compromise and is only extended to those who suffer true financial hardship, typically due to things like catastrophic health-care expenses combined with a low prospect for future earning potential.
- If you are not one of the few that qualifies for an Offer in Compromise, you can still work with the IRS under the Fresh Start program and enter into an Installment Agreement. Taxpayers with up to $100,000 in tax debt may qualify as long as all past tax returns have been filed. You cannot qualify for an Installment Agreement if you have entered into one in the last 5 years or if you are filing for bankruptcy. These agreements may extend your payment period out as much as 84 months.
- For those with lesser amounts owed, there are also short-term extensions of time to pay. This can be helpful if you simply need a little more time to liquidate assets or earn additional income to pay the tax debt.
- Consider finding alternative ways to pay your tax debts. Due to the large penalties and interest rates assessed, it often makes more financial sense to take out a loan or pay taxes on credit cards because the rates can be lower. Before using this strategy, consult a financial advisor and read the terms carefully.
- Ward off liens, levies and other collection activities by sending in some amount of repayment rather than nothing. Something is better than nothing and the IRS tends to look favorably upon effort to pay while not so favorably upon being ignored.
- Get a professional opinion on the amount owed. Make sure the amount of the tax debt you are attempting to resolve is actually correct. This may require reviewing your withholding amounts, ensuring you are claiming the correct number of exemptions, reviewing your filing status and checking your deductions. An experienced tax controversy attorney can help you with this type of assessment , determine what strategy to implement and negotiate with the IRS on your behalf.
Be prepared for some of the new changes affecting taxes in 2020. The impact from recent tax law changes stemming from the Tax Cuts and Jobs Act of 2017 are still impacting taxpayers. For example, if you plan to itemize your unreimbursed medical and dental expenses, they will need to exceed 10% of your 2019 adjusted gross income in order to be deductible. That is an increase from the 7.5% requirement in years past.
If you pay or receive alimony, the alimony deduction was eliminated and took effect in 2019. For divorce and separation agreements made or modified in 2019 and beyond, alimony payments will not be deductible.
IRA contribution limits are increasing for the first time since 2013. The 2019 contribution limits are:
- 401(k) base contribution: $19,000 (up from $18,500 last year)
- 401(k) catch-up contribution (for taxpayers age 50 and older): additional $6,000 (unchanged)
- IRA base contribution: $6,000 (up from $5,500)
- IRA catch-up contribution (for taxpayers age 50 and older): additional $1,000 (unchanged)
Standard deductions are also a little higher this year as well, based on inflation. Use this interactive tool to determine your standard deduction.
Income brackets are also higher due to inflation. For a complete 2019 tax rate table showing all tax filing statuses, see the IRS website here.
Be prepared in 2020. Know what changes may impact your tax obligations. File your taxes on time. Consult with experienced tax professionals to help you get out of tax debt in 2020 and start your path to financial freedom.
For a consultation with a group of compassionate, experienced and knowledgeable tax controversy attorneys, call Murray Moyer, PLLC at (919) 846-6779.
Written by Justin Moyer on December 28, 2019.