It is early enough in the year to start planning your tax return and determining the potential financial ramifications. Whether you will owe money to Uncle Sam at the end of the year, or be due a refund, here are some helpful tips that could better prepare you for the coming months.
Always File Your Return On-Time
The biggest mistake I see each year is failing to file a tax return by the designated deadline. Many people use the excuse “well I can’t pay my taxes so why should I even file?” Simple. Failure-to-file penalties are much more severe than failure-to-pay penalties. The IRS assesses a 5.0% penalty per month (up to 25%) on the total tax due. Compare that to a 0.5% penalty per month for failing to pay your tax by the due date. If you do not think you will be ready to file by April 15th, file an extension! It will not give you an extension of time to pay the tax you owe, but it will at least prevent a failure-to-file penalty and give you until October 15th to straighten out your tax records. If you cannot pay the tax when it is due, you can always contact the IRS and opt for a payment plan.
Opt for Premium Tax Credit as Year-End Credit
It may be too late for 2014, but, if you receive the Premium Tax Credit (PTC), make sure to report any change of income to the IRS during the tax year. There are two ways to receive the PTC, as a credit on your return at the end of the year based on your actual taxable income or as monthly installments based on your estimated taxable income for the year. If you chose the latter option, you MUST notify the IRS of any change in your estimated income. If your income increased and you wait until the end of the year, you will owe additional taxes to “repay” the amount of the PTC you were overpaid. Even if you did not have a change of income during the year, you still may be required to pay back the overpayment if you understated your estimated income at the beginning of the year. Since this method is tricky, I suggest being cautious. Take the PTC as a credit at the end of the year so there are no surprises.
Do Not Ignore the IRS
This should be simple advice, but if you receive a letter from the IRS stating you owe money, that you haven’t filed a return or that you need to submit more information, do not disregard the letter! The IRS doesn’t forget and will not simply let you go if you continually choose to ignore the requests. If you think the letter is incorrect or do not know how to respond, call the IRS or take it to a local CPA firm to discuss any potential response. Most local firms offer free consultations and will help you determine the best course of action.
It is still very early in the game, do not make these tax mistakes and do not let April 15th sneak up on you!