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MONTHLY TAX NEWSLETTERApril 2014
Never in my 25+ career as a CPA and Tax Professional have I seen so many people owe so much taxes. As we wrote in our last month's newsletter in the article: Higher Taxes On Lower Income For High-Income Taxpayers, many two-earner high-income households are shocked to find out that they owe tens of thousands of dollars in federal income taxes for 2013.
What should you do if you have a balance due to the IRS for your 2013 taxes, but don't have enough money to pay what you owe by April 15th? Here are a few suggestions to help you buy some time:
If you can pay most of your taxes by April 15th
If you're able to pay at least 90% of your total tax liability as reflected on your Form 1040, all you need to do is file for an automatic extension of time to complete your tax returns. This strategy allows you to defer paying as much as 10% of your 2013 federal income taxes until October 15th. Keep in mind that the IRS will assess interest (of approximately 3%) on the balance due. Expect the IRS to also assess a "failure to pay" penalty of 0.5% per month on the balance due if the amount you owe exceeds 10% of your federal tax liability.
To file for an extension, simply complete and submit a Form 4868 with the IRS. To see how much taxes you need to pay with the extension to avoid paying any penalties, make sure that your total taxes paid in during the year plus the amount will you be paying in with the Form 4868 exceeds 90% of line 61 of your Form 1040.
If you'll be able to come up with the balance due in the not too distant future
Let's say that you don't have enough money to pay your taxes by April 15th, but anticipate getting the money to cover the shortfall during the next month to six weeks. If you're in this boat, make sure to file your tax return by April 15th, and include a check to the United States Treasury for as much as you can afford to pay at that time. During the month of May, the IRS should send you a bill reflecting the balance of taxes that are due. Soon after receiving that notice, send in a check to the IRS paying off the total amount due.
Don't forget that you'll owe interest, plus the "failure to pay" penalty of 0.5% per month, on the outstanding balance.
If you need more time to pay off the taxes that are due
One other alternative is to enter into an installment arrangement with the IRS. This is done by completing and filing a Form 9465, and including the completed Form 9465 with your federal income tax return. On this installment request form, you tell the IRS how much you can afford to pay each month and the day of the month that the payment will be made.
You can also use the IRS' Online Payment Agreement Application to enter into an installment payment plan.
The IRS charges a fee of (around) $52 to any taxpayer who enters into an installment arrangement and signs up to have the taxes paid each month with direct debit. In addition, the IRS will charge interest at around 3% per year, and a "failure to pay" penalty of 0.5% per month on the outstanding balance. Please note that missing a scheduled payment causes the remaining outstanding balance to become immediately due.
The Last Resort - Offer in Compromise
If the amount you owe is so large that you can't pay it off through an installment plan, your last resort is to enter into an "Offer in Compromise" with the IRS to try to get them to reduce the amount of taxes owed. You can find information on Offers in Compromise on the IRS' website (www.irs.gov).
If you can pay your taxes but need more time to fund your self-employed retirement plan
And if you're self-employed, filing for an extension buys you an extra six extra months to fully fund your retirement plan. Under the current rules, you can generally deduct contributions made to your retirement plan, prior to the due date of the tax return, including extensions. One strategy common to self-employed individuals is to pay the full amount of taxes due on April 15th with the Form 4868, and then fund their retirement plans prior to October 15th.
Always Submit Something on April 15th
As you can see, if you owe money to the IRS, you can expect to always be charged interest, and also might be stuck with a "failure to pay" penalty of 0.5% per month, on the amount of taxes owed - as long as you file your tax return or an automatic extension request by April 15th.
The penalty for not filing your tax returns or an extension request by the applicable deadline, however, is a whopping 5% per month, up to a total of 25%, on the total taxes owed. Since the failure to pay penalty is so much smaller that the failure to file penalty, always try to file your tax returns or extension requests on a timely basis even if you're unable to pay the full amount of the taxes due at that time.
There’s a right way and a wrong way to do anything that matters, and nothing matters more than owning a comfortable place that you and your family can call “home.” But this necessity often bears a hefty sticker price, particularly if you practice in a major metropolitan area like New York, D.C., Chicago, or just about anywhere in California. Even small towns often boast homes with 7-figure price tags, perfect for a doctor who wants enough land to really enjoy his privacy.
How do you go about buying, or more precisely, financing a home priced at $1 million or more.
Most people have only two options but physician have three.
1. Pay With Cash
The downside of paying cash for a home is obvious: many physicians just don’t have what it takes. But there’s more to consider here.
Plunking down $1,000,000 cash will tie up those resources for years, keeping you from investing for retirement or perhaps buying a practice. Paying cash is also a liquidity trap since the only way to regain access to that cash is to sell or refinance. But there’s one more thing to worry about: lawsuits. Unless you title your home correctly, all that equity makes a tasty target for anyone who sues you, and your home equity is a matter of public record in most states.
The big advantage of paying cash is simply knowing that you’re “done” paying for a home, and feeling secure in the decision. Also, it may be a little bit easier to actually close on the home since you dodge a ton of administrivia that goes with getting a loan.
Paying cash might be a good move if you are near the end of your career and you have saved up most of the resources you’ll need for retirement, or if you’re super-conservative and you can’t stomach the thought of investing while being in debt on your house.
2. Go Conventional
If the Veteran’s Administration can back it or Fannie Mae can buy it, your home mortgage will bear one of the lowest rates available in the marketplace, which is the big advantage of so-called “convential” mortgages.
For physicians though, conventional does not mean convenient. “To get conventional financing, you have to squeeze yourself into a tiny box for the sake of underwriting, which isn’t always a good fit for doctors,” says Josh Mettle, a senior loan officer with Utah Physician Home Loan. Like everything touched by the government, strict guidelines and red tape are the norm, so some physicians—particularly those just out of training—simply do not qualify.
Perhaps the greatest impediment for the million-dollar home buyer is the down payment. Since the current limit for conforming loans is $417,000 throughout much of the US, and up to $625,500 in pricier markets, your down payment may run up to $583,000.
Mid-career physicians, those in the more highly-paid specialties, and terribly thrifty savers who are stepping up from a less costly home should consider conventional financing but everyone else should keep reading…
3. Get a Doctor Loan
Back before we every heard the words “new normal,” practically anyone with a pulse and a paycheck could land a seven-figure home with a low down payment and easy approval. Fortunately for physicians, that’s still the case. A special bank-based home loan program known generically as a “doctor loan” uses underwriting criteria that recognize your earning capacity as a medical practitioner, making it way easier to qualify for the loan.
If you’re a newly-minted physician, you may have been denied a loan due to insufficient earnings history. That’s a real pain if you’re trying to buy a new home and start a new job at the same time. Don’t worry though. Some physician-centric lenders will allow you to close on your home purchase up to 90 days before your first paycheck arrives, basing their underwriting decision on your signed employment contract or offer letter.
Got student loans? Unlike conventional financing, your student loan debt will not count against you when you apply for a doctor loan. This means you’ll go into underwriting with a better debt-to-income ratio and come out qualifying for a bigger home.
How much bigger might that home be? In many situations, a doctor loan with down payment as low as $50,000 can fetch you a $1 million home. With decent credit, physicians can borrow up to $400,000 with zero down.
Since banks don’t sell these loans to the government, doctor loans often demand interest rates that can be 0.25% to 0.75% more than conventional loans, with slightly higher closing costs. There’s a tradeoff here, since doctor loans do not require private mortgage insurance (PMI) like conventional loans do.
Whether you pay cash, go conventional, or get a doctor loan, a bigger home will have a bigger impact on your ability to invest for retirement, save for college or buy into a practice. Consider your options carefully and consult your financial advisor before you make your final move. The only thing more important than your family’s comfort today is their financial security tomorrow.
We're pleased to share with you with links to the following presentations recorded during 2013:
Physicians, dentists, psychologists, and other healthcare professionals can often times save some taxes by deducting their unreimbursed professional expenses. Check out this presentation to learn about a variety of professional expenses commonly deducted by doctors in the U.S.
Wondering which type of retirement plan makes the most sense for your practice? Check out this presentation on the most common retirement plan options available to practice owners. You'll also learn why it makes sense to set up and begin to max out your retirement plan savings as soon as possible.
The ten "million dollar metrics" presented in this video will provide general dentists with valuable insight to help improve their practice management. General dentists can learn which metrics to generate to gauge how their dental practice is doing, and then compare those metrics with other general dental practices, including those practices from the sample that collected one million dollars or more during 2012.
Learn to increase revenues and profits at your practice by implementing a Simple Incentive Bonus System. For short we call this SIBS. We've seen a lot of clients implement bonus system similar to the one presented in this video who saw immediate positive results within their practice.
Recorded Short Presentations on QuantiaMD:
We also have four three-minute multi-media podcasts, including insightful poll questions, available only on QuantiaMD:
Suggestions for Future Recorded Presentations???
If you have any suggestions for information you'd like us to include in our 2014 recorded presentations, please e-mail me.
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