At this late stage of the tax filing game, I would like to make an observation and offer some advice on extensions and installment agreements. My friends, I appreciate your reading of my articles and appreciate your listener ship of my radio program, ¡°Better Business¡±. Let me return the favor and offer you some more free income tax advice.
If you are going to owe money, don¡¯t put your return on extension thinking this will give you more time to pay. If you don¡¯t have the money to pay, fill out an installment request, form 9465, and attach it to your 1040 by April 16 (April 17 for some of you lucky taxpayers). The Internal Revenue Service will accept this installment agreement without consideration providing the tax due is paid within a three year period. Your state and local governments will also accept this form for the most part. For example, if you owe $5,000 on your federal return, but can only send $1,000; fill out form 9465 to reflect this. You will then be able to get a term loan over the next three years to pay the remaining balance due. You will be asked to select a time frame, a monthly amount, and a time each month you would like to make the payment. Be realistic by choosing a payment you can afford, but pay it off as soon as possible.
The next issue I would like to discuss with you involves federal form 4868. This is the automatic extension request giving you until October 15, 2007 to file your 2006 income tax return. The old rules gave a taxpayer until August 15th to file the return, allowing for an additional extension until October 15th with more involved circumstances. If you are going to owe money and have it to pay but are waiting for more information to complete your return, complete form 4868 by showing the total expected income tax due less any withholding and estimated payments. The balance remaining is what should be sent with the extension request. If you are one of those taxpayers making estimated tax payments each quarter, combine your estimate with the mount you expect to owe. Using our example above suppose your total liability for 2006 is expected to be $20,000. You have made estimates totaling $15,000 during the year leaving you with a balance due of $5,000. If you project that you will need to make estimates of $4,000 each quarter for 2007, show your expected tax liability for 2006 to be $24,000 ($20,000 actual expected tax due plus the first quarter estimate for 2007). Subtract from this balance the $15,000 in estimated payments you have made during the 2006 tax year, and show a balance due of $9,000 on form 4868. Send this $9,000 in with your extension request. This will keep you from having to file a separate estimated coupon (form 1040ES) and will give you additional protection against penalty. For example, assume that your estimate of $20,000 in total tax for 2006 is low by $2,000. You will now have enough paid in to cover any penalty and interest charge. The remaining balance of $2,000 from your extension payment of $9,000 will be applied to your 2007 estimates by electing so on your 1040. You can then make up any short fall for 2007 by making more estimated payments or increasing withholding from your pay. I think this is very clever.
The final thing I would like to mention to you in this article deals with under estimated tax penalties. There are three essential ways to avoid paying this underestimated penalty. The first way is to pay in 100% of your previous year¡¯s income tax (110% if your adjusted gross income for the previous year is $150,000 or more). The next way is to pay in at least 90% of the current year¡¯s income tax liability. You will need to make an income change consideration in order to determine which method to use. For instance, if you had abnormally high income in the previous year (i.e., a one time realization of capital gains), it will not make sense to base your current year¡¯s estimate on last year¡¯s income tax liability. It would make more sense to project 90% of your current year¡¯s expected liability. The final way to avoid penalty is to consider annualizing your income. Suppose you had a big capital gain in December and you owe money because of this. If you do not annualize your income, the Internal Revenue will assume that the gain was earned equally throughout the year. This could cause a penalty. To avoid this, fill out form 2210 and elect to annualize your income. Put your capital gain in the fourth quarter of 2006 where it belongs, and eliminate all or a portion of any penalty. For those of you using one of the tax software programs, this will be an easy calculation.
As always, if you need any help with anything mentioned in this or other articles, please do not hesitate to contact me. I wish to help everyone in the world with there stress over income taxes.
Ron Piner, CPA
Host of ¡°Better Business¡±
Saturday Mornings at 10ET
ON WBIS AM 1190
http://www.wbis1190.com/
http://www.mwibonline.com/
taxguy9@hotmail.com
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