Did you miss this year’s personal tax filing deadline?
Unfortunately, the IRS does not simply look the other way with regard to taxpayers missing the tax filing deadline. Not filing your taxes by the due date will result in the following assessed IRS penalties for many taxpayers:
- The Failure to File penalty equals 5% of the tax owed for each month that the tax return is late in being filed and is capped at five months time (and reduced by the assessed Failure to Pay penalty).
- The Failure to Pay penalty equals 0.5% of the unpaid tax owed by the taxpayer until paid in full and is capped at 25% of the unpaid tax.
In addition to the penalties noted above, the IRS also charges interest on the tax balance owed after the due date, plus interest on the accessed penalties unpaid. IRS interest assessed is calculated by adding 3% to the federal short-term rate. The current IRS interest rate is approximately 5%.
As these assessed IRS penalties plus interest can quickly increase your existing tax balance owed, we recommend filing as soon as possible after the missed tax filing deadline.
However, for taxpayers due a refund, there is no Failure to File penalty or other penalty assessed by the IRS.
Filing an extension allows taxpayers to file late, but does not allow taxpayers to pay late:
The primary benefit of fling an extension of time to file your taxes is that the taxpayer will be granted an additional 6 months of time to compile all their tax information in order to prepare their personal tax return. However, this extension of time to file, does not allow taxpayers to pay their taxes after the due date. Taxpayers should estimate as accurately as possible the taxes owed as of the due date and make that payment by the due date with the extension being filed. Owing taxes after the due date once the tax return is eventually completed will result in the taxpayer being assessed a Failure to Pay penalty plus interest.
However, for taxpayers that filed an extension and paid the estimated tax balance owed by the extension filing due date, if at least 90% of taxes were paid in by the due date, then generally there would be no Failure to Pay penalty assessed once the tax return is eventually completed and filed.
Penalty relief for certain late filers:
Taxpayers that have a “clean” IRS penalty history can apply for penalty abatement from the late filing and late payment penalties assessed by the IRS if the following conditions are met:
- No tax penalties in the 3 prior tax years,
- All prior year tax returns have been timely filed, and
- Prior taxes have been paid or are arranged to being paid.
This penalty waiver process is known as the IRS’s First Time Penalty Abatement policy. Additionally, if the abatement proves successful, any interest assessed on the penalty will also be waived as well.
Can’t pay your tax bill?
If you owe the IRS more than you can afford to pay once your tax return is prepared or if additional taxes are owed related to an IRS tax notice, the IRS allows qualifying taxpayers to apply for a Long-Term Payment plan, commonly known as an Installment Agreement.
If the tax balance owed by the taxpayer exceeds $25,000 then monthly payments must be made via auto withdrawals from their bank account. This EFT payment method is referred to as the Direct Debit Installment Agreement (DDIA). If the tax balance owed is $25,000 or less, taxpayers have the choice of making their monthly loan payments either via checks mailed to the IRS or via DDIA.
The IRS charges a setup fee for the installment agreement. If the installment agreement application is applied on-line there is a $31 setup fee for DDIA and a $130 setup fee if non-automated payments are to be made monthly.
Applying on-line for an IRS payment plan can be done on the IRS website at the link below:
Online Payment Agreement Application | Internal Revenue Service (irs.gov)
Benefits to paying taxes on the IRS website:
The IRS makes it easy for taxpayers to pay electronically via EFT from taxpayers’ bank accounts for taxes owed and estimated taxes. This process is known as Direct Pay on the IRS website. When paying online, the taxpayer receives an immediate confirmation of the payment made plus an email confirmation as well. On the IRS website, taxpayers can also sign up to view their tax payment history.
Making an immediate online EFT payment can relieve the stress of checking your bank account daily waiting to see when your IRS payment check (balance due or estimated tax payment) has cleared. The IRS link to pay via Direct Pay is at the link below:
Direct Pay | Internal Revenue Service (irs.gov)
Why did you decide to become a coach for women physicians?
Doctors — and women, frankly — are notorious for deprioritizing themselves. I have three daughters and I don’t want to normalize this for them. Society holds us to a very difficult standard in terms of how we spend our time. When/if we prioritize family or personal life, we risk being perceived as somehow lesser than. This feeds into imposter syndrome, struggles with work-life integration, and high rates of burnout in healthcare and in other fields as well. Having grappled with these issues personally, I know exactly how painful this can be, and also how valuable the tools of coaching can be for this. I help women create sufficiency in the ongoing juggle of home and work. I help them set goals, overcome obstacles, and get out of their own way. Most of all I help them have compassion for themselves. My clients amaze me with their strength, intelligence and humanity every single day. They often come to me struggling to recognize this in themselves.
In teaching the tools of coaching, I help them feel empowered to take action and determine a path forward.
This sort of support should be a required part of training for doctors, especially these days. We are going through such challenging times, yet there is stigma around seeking help, showing a level of vulnerability that implies you’re human, and being open to guidance.
Coaching is an incredibly powerful way to create the outcomes we want to see, in our own lives. It’s a process to take inventory of what you are and are not satisfied with, and take action to drive strategic change. The results that you can create with this kind of approach are infinite!
Learn more on Karen’s Website, at her Facebook Group and Instagram, or email Karen at email@example.com to set up a free introductory consult call.
Contributing to a Health Savings Account is unique by allowing for tax-deductible contributions combined with tax-free distributions. No other tax-advantaged savings opportunities allow for both.
With each passing year, HSAs continue to gain in popularity. To be eligible, you need to be a participant in a qualifying high-deductible health insurance plan sponsored by your employer or purchased individually. Ask the insurance company that administers your current health plan whether you qualify to contribute to an H.S.A.
According to the IRS in their Publication 969 on Health Savings Accounts and Other Tax-Favored Health Plans available at: https://www.irs.gov/pub/irs-pdf/p969.pdf: For 2022, if you have self-only HDHP coverage, you can contribute up to $3,650. If you have family HDHP coverage, you can contribute up to $7,300. The IRS just announced that the maximum contributions to an H.S.A. for 2023 will increase to $3,850 for individuals with self-only coverage and $7,750 for individuals with family coverage.
Anyone 55 or older can add an additional $1k to their H.S.A. this year. Married couples with both spouses over the age of 55 can add a second $1k, but the second spouse would need to set up their own Health Savings Account, which shouldn’t be a dealbreaker. The deadline to contribute to your H.S.A. is April 15th of the following year. So now is the time to start contributing for 2022.
Unlike Flexible Spending Accounts that come with a “use it or lose it” provision requiring the money to be spent on your family’s medical expenses the year it is set aside, money in an H.S.A. can be invested long-term in a tax-deferred account that will be available to pay your family’s healthcare costs down the road. A common strategy is to max out the contributions to the H.S.A. each year, but then use personal funds to pay medical expenses as they become due as a way to keep as much money as possible growing within the tax-advantaged Health Savings Account.
Most financial institutions now allow for investors to set up Health Savings Accounts, allowing individuals to easily invest their H.S.A. in mutual funds or ETFs.
Tax deductible contributions coupled with tax free distributions is as easy as finding out if you participate in a qualifying high deductible health insurance plan and then maxing out the allowable contributions into a Health Savings Account whenever eligible.
We first wrote about I-Bonds in an article included with our November Newsletter available at:
I-bonds are a great place to park some extra money if you are worried about the short-term prospects for the stock market and are nervous that increasing interest rates will cause bond funds to decline in value too.
If you didn’t invest some of your extra money in I-Bonds when those treasury bonds were paying 7.12% interest, how about setting up an account at www.treasurydirect.gov and purchasing those inflation protected bonds now that rates are projected to be at 9.62%? (according to an article by Forbes available at: https://www.forbes.com/sites/robertberger/2022/04/21/i-bonds-set-to-deliver-historic-962-interest-rate)
More information on I-Bonds is available at: https://treasurydirect.gov/indiv/products/prod_ibonds_glance.htm
If you received an ERC for 2020, we’ll be preparing an amended 2020 tax return this summer for you to report the amount of the ERC received as a decrease to deductible wages. Expect to owe taxes of about 35% of the ERC received with the amended tax return. While owing additional 2020 taxes on the amount of the ERC received is fine, paying penalties on the taxes due wouldn’t be fair since the ERC wasn’t actually received until 2022.
Why would you be penalized? If the amount of taxes you owe after April 15th exceed a certain threshold based on each taxpayer’s total tax liability, the IRS automatically tacks on penalties. These penalties tend to be relatively modest, but the higher the ERC received, the higher the penalties could be in connection with the 2020 amended return you’ll be submitting.
Recently , the IRS issued a news release reminding taxpayers that they can get penalties waived for amending 2020 tax returns due to the ERC at https://www.irs.gov/newsroom/irs-reminds-employers-of-penalty-relief-related-to-claims-for-the-employee-retention-credit as follows:
IR-2022-89, April 18, 2022
WASHINGTON — The Department of the Treasury and the Internal Revenue Service have received requests from taxpayers and their advisors for relief from penalties arising when additional income tax is owed because the deduction for qualified wages is reduced by the amount of a retroactively claimed employee retention tax credit (ERTC), but the taxpayer is unable to pay the additional income tax because the ERTC refund payment has not yet been received.
Treasury and the IRS are aware that this situation may arise, in part, due to the IRS’s backlog in processing adjusted employment tax returns (e.g., Form 941-X) on which the taxpayers claim ERTC retroactively. Based on applicable law, IRS guidance provides that an employer must reduce its income tax deduction for the ERTC qualified wages by the amount of the ERTC for the tax year in which such wages were paid or incurred. Taxpayers that claimed the ERTC retroactively and filed an amended income tax return reducing their deduction for the ERTC qualified wages paid or incurred in the tax year for which the ERTC is retroactively claimed have an increased income tax liability but may not yet have received their ERTC refund.
This release reminds taxpayers that, consistent with the relief from penalties for failure to timely pay noted in Notice 2021-49, they may be eligible for relief from penalties for failing to pay their taxes if they can show reasonable cause and not willful neglect for the failure to pay. In general, taxpayers may also qualify for administrative relief from penalties for failing to pay on time under the IRS’s First Time Penalty Abatement program if the taxpayer:
- Did not previously have to file a return or had no penalties for the three prior tax years,
- Filed all currently required returns or filed an extension of time to file and
- Paid, or arranged to pay, any tax due.
Don’t forget – these are the upcoming tax deadlines for 22021 Individual (1040) tax returns:
Friday, April 15
- Deadline to file FinCEN Form 114 for Foreign Bank and Financial Accounts (FBAR)
Monday, April 18
Deadline changed due to April 15 Emancipation Day holiday in Washington, DC
- Deadline to file personal (1040) tax returns for taxpayers except MA and Maine residents
- Deadline to pay Estimated Tax Payments for 1st Quarter 2022
- Deadline to make any IRA contributions for 2021
Tuesday, April 19
Special deadline for Massachusetts and Maine residents due to Patriot’s Day holiday on April 18
- Deadline to file personal (1040) tax returns for MA and ME residents
- Deadline to pay Estimated Tax Payments for 1st Quarter 2022 for MA and ME
- Deadline to make any IRA contributions for 2021 for MA and ME
TIP – Avoid the Crush! IRS and State Dept. of Revenues’ servers experience extremely high volumes close to efiling deadlines. This can cause processing delays (or worse, temporary outages). Don’t wait until April 18/19 to send in your efile forms.
From IRS News – IR-2022-52
The Internal Revenue Service reminds taxpayers they may be able to claim a deduction on their 2021 tax return for contributions to their Individual Retirement Arrangement (IRA) made through April 18, 2022.
An IRA is a personal savings plan that lets employees and the self-employed set money aside for retirement and can have tax advantages. Contributions for 2021 can be made to a traditional or Roth IRA until the filing due date, April 18, but must be designated for 2021 to the financial institution.
Generally, eligible taxpayers can contribute up to $6,000 to an IRA for 2021. For those 50 years of age or older at the end of 2021, the limit is increased to $7,000. Qualified contributions to one or more traditional IRAs may be deductible up to the contribution limit or 100% of the taxpayer’s compensation, whichever is less. There is no longer a maximum age for making IRA contributions.
Those who make contributions to certain employer retirement plans, such as a 401k or 403(b), an IRA, or an Achieving a Better Life Experience (ABLE) account, may be able to claim the Saver’s Credit. Also known as the Retirement Savings Contributions Credit, the amount of the credit is generally based on the amount of contributions, the adjusted gross income and the taxpayer’s filing status. The lower the taxpayer’s income (or joint income, if applicable), the higher the amount of the tax credit. Dependents and full-time students are not eligible for the credit. For more information on annual contributions to an ABLE account, see Publication 907, Tax Highlights for Persons With Disabilities.
While contributions to a Roth IRA are not tax deductible, qualified distributions are tax-free. Roth IRA contributions may be limited based on filing status and income. Contributions can also be made to a traditional and/or Roth IRA even if participating in an employer-sponsored retirement plan (including a SEP or SIMPLE IRA-based plan).
Taxpayers can find answers to questions, forms and instructions and easy-to-use tools at IRS.gov. This news release is part of a series called the Tax Time Guide, a resource to help taxpayers file an accurate tax return. Additional help is available in Publication 17, Your Federal Income Tax For Individuals.
Higher education is important to many people and it’s often expensive. Whether it’s specialized job training or an advanced degree, there are a lot of costs associated with higher education. There are two education tax credits designed to help offset these costs – the American opportunity tax credit and the lifetime learning credit.
Taxpayers who paid for higher education in 2021 can see these tax savings when they file their tax return. If taxpayers, their spouses, or their dependents take post-high school coursework, they may be eligible for a tax benefit. To claim either credit, taxpayers complete Form 8863, Education Credits, and file it with their tax return.
These credits reduce the amount of tax someone owes. If the credit reduces tax to less than zero, the taxpayer could even receive a refund. To be eligible to claim either of these credits, a taxpayer or a dependent must have received a Form 1098-T from an eligible educational institution. There are exceptions for some students.
Here are some key things taxpayers should know about each of these credits.
The American opportunity tax credit is:
- Worth a maximum benefit of up to $2,500 per eligible student.
- Only available for the first four years at an eligible college or vocational school.
- For students pursuing a degree or other recognized education credential.
- Partially refundable. People could get up to $1,000 back.
The lifetime learning credit is:
- Worth a maximum benefit of up to $2,000 per tax return, per year, no matter how many students qualify.
- Available for all years of postsecondary education and for courses to acquire or improve job skills.
- Available for an unlimited number of tax years.
Taxpayers can use the Interactive Tax Assistant tool on IRS.gov to figure out if they’re eligible for either of these credits.
Compare Education Credits
Publication 970, Tax Benefits for Education
If your high school or college aged child needs to file a tax return only to have federal or state income taxes withheld from their pay refunded, then why not file for free? For federal taxes, this generally applies to dependents who earned no more than $12,550 (in 2021) unless they also have investment income exceeding $350.
Even if your child earns more than $12,550, if the only income is from W-2 wages, then please take advantage of the IRS’ free filing. Just be careful to check the box on Page 1 or their 1040 reflecting that the child can be claimed as your dependent or you might lose out on the valuable tax credit of $3k per child under the age of 17 (increased to $3.6k for kids 5 and under) or $500 per older dependent child.
While preparing your child’s tax returns, please consider contributing the lesser of your child’s gross wages or $6,000 into a Roth IRA for your child. Think decades of tax-free compounded growth on those contributions. The due date to contribute to an IRA for 2021 is 4/15/22.
If a child is filing a tax return to report significant investment income, however, the overly complex Kiddie Tax rules might deter even the most tax-savvy parents from trying to file for their kids using the free software.
And if you do have a working child who won’t earn more than $12,950 in wages during 2022, please instruct your child to claim Exempt on the new W4 form to avoid the need to file a tax return for that child next winter only to get a refund of federal taxes that didn’t otherwise need to be withheld. Here are the instructions for your child to claim exempt:
Exemption from withholding. You may claim exemption from withholding for 2022 if you meet both of the following conditions: you had no federal income tax liability in 2021 and you expect to have no federal income tax liability in 2022. To claim exemption from withholding, certify that you meet both of the conditions above by writing “Exempt” on Form W-4 in the space below Step 4(c). Then, complete Steps 1(a), 1(b), and 5. Do not complete any other steps.
The IRS now requires that all individuals answer this question about cryptocurrency on the first page of their personal tax returns: At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency? According to the Form 1040 instructions:
If, in 2021, you engaged in any transaction involving virtual currency, check the “Yes” box next to the question on virtual currency on page 1 of Form 1040 or 1040-SR. A transaction involving virtual currency includes, but is not limited to:
- The receipt of virtual currency as payment for goods or services provided
- The receipt or transfer of virtual currency for free (without providing any consideration) that does not qualify as a bona fide gift
- The receipt of new virtual currency as a result of mining and staking activities
- The receipt of virtual currency as a result of a hard fork
- An exchange of virtual currency for property, goods, or services
- An exchange/trade of virtual currency for another virtual currency
- A sale of virtual currency
- Any other disposition of a financial interest in virtual currency.
Due to this reporting requirement, we now ask each of my clients during our tax prep meeting whether during the year they purchased, sold, or otherwise acquired any virtual currency, including bitcoin. The response we get is usually one of the following three questions:
- Have you?
- Should I?
- How can I invest in something I don’t understand?
To learn more about Cryptocurrency, check out Alex Oliver’s recorded Webinar available at: https://www.youtube.com/watch?v=MFfuClWwakA.
In his webinar, Alex addresses that a diversified portfolio has long included various types of assets that range from large, mid-sized, and small companies, to value versus growth-oriented businesses, to various sectors within the economy, fixed income, commodities, and much more. With the total market capitalization of cryptocurrencies rising from $1 trillion to $3 trillion in 2021, is it time to add crypto assets to your IRAs, Roth IRAs, and investment accounts? If so, what percentage of your portfolio is appropriate? Which avenues are the best ways to invest? Join Alex Oliver in a quickly evolving discussion around one of the hottest topics in the investing world.