Paying your taxes

I remember my very first bank account.  At a young age before I was driving, I somehow managed to obtain a job as a child disc jockey on a local kids radio program.  I worked 2 hours a week for $5 per hour and my job was to record a series of trivia snippets that were later aired on the radio.  After my dad got tired of toting me down to the bank every month to cash a $40 check, he helped me open a bank account.  I handed the teller my money, she put it in a drawer and handed me back a checkbook.  In order to get money out, I had to go into the bank and make a withdrawal.  

My how times have changed.  Now, 15 years later, 99% of my expenses are done automatically over the internet and I probably couldn't tell you where my checkbook was without looking for a minute.  What's more is that this is common for a fair amount of the population now.  So if you're a taxpayer and you owe taxes and you're having a hard time finding your checkbook, what are your options?

With the increasing popularity of electronic filing of tax returns, it seems that the IRS has also become open to the idea of receiving payments electronically as well.  Short of mailing in a paper check to pay taxes, the IRS also has other options available to taxpayers.  

Debit or credit card

Taxpayers can use one of a number of approved payment processors to pay their taxes with a debit or credit card.  The catch is that there are fees associated with the transaction that vary depending on which processor you choose.  For example, Pay1040.com will process your transaction for a flat fee of $2.79 if you use a debit card and 2.35% of the amount if you use a credit card.  This is a good option for taxpayers that are willing to pay the fee for the convenience factor and want to earn a couple of extra points on their credit card.  

Electronic Federal Tax Payment System (EFTPS)

EFTPS provides a taxpayer with online access to a tax payment account.  The taxpayer can attach their EFTPS to a bank account, view previous payments, and schedule future payments.  The EFTPS system is free and available to all types of taxpayers.  In fact, some businesses are required to use EFTPS.  Once a taxpayer signs up for EFTPS, they will receive a confirmation with a PIN in the mail, which they will use when they login.  EFTPS is a good option for all businesses, and individuals that make large payments or estimated tax payments.  The EFTPS system allows you to schedule future payments, reducing the risk that a taxpayer will forget to make their quarterly tax payments.  

Direct Pay

Direct Pay is a new option offered by the IRS.  Instead of using a card, Direct Pay allows a taxpayer to draft their taxes directly out of their bank account.  The process requires the taxpayer to verify their identity and enter bank information, and it has no cost to the taxpayer.  This is a good option for individual taxpayers that owe any amount and do not want to go through the EFTPS process.  Currently Direct Pay is only available to individual taxpayers, not businesses.  

Of course, taxpayers can always use the conventional method to pay their taxes by writing a check.  

Idea$ 2014 - March: Taxes

As a part of the continuing Idea$ 2014 series, the month of March is dedicated to taxes. Specifically, this topic will address organizing tax documents, types of information to communicate to your paid preparer and ways for taxpayers to DIY if so inclined.  

The basics

Business returns for C Corporations (Form 1120) and S Corporations (Form 1120S) are due on March 17, 2014 (typically this is March 15, but since that falls on a Saturday this year, the due date is pushed to the next Monday).  Other returns including Partnerships (Form 1065), Fiduciary/Trust (Form 1041) and Individuals (Form 1040) are due on April 15, 2014.  

If the taxpayer cannot file by these dates, an automatic extension can be obtained.  The extension for corporations and partnerships extends the deadline to September 15, and the extension for individuals and trusts extends the deadline to October 15.  However, it is important to note that this is an extension of time to file, not time to pay.  If a taxpayer expects to owe tax on the return, a payment should be made with the extension in order to avoid penalties and interest.  

Income

Common income documents include:

• W2's - taxpayers that work for an employer should receive this showing their income and withholding amounts.
• 1099's - these are catch all documents for interest (1099-INT), dividends (1099-DIV), capital gains (1099-B), self-employment income (1099-MISC), social security (SSA-1099) and retirement income (1099-R).  
• Schedule K-1's - will be received if the taxpayer has an interest in a partnership, S-corporation, or trust.  

Deductions

Common deduction documents include:

• Tax payments for real estate and personal property
• Mortgage interest (Form 1098) - this form will include mortgage interest paid and possibly real estate taxes if they are paid through escrow
• Charitable contributions - for both cash and non-cash contributions, the taxpayer should have a receipt from the organization.  
• Medical expenses not reimbursed from a flexible spending account or other insurance program
• Tuition, fees and student loan interest
• Expenses for dependent care
• Contributions to retirement plans

Why the rush?

A taxpayer may wonder, if the return is not due until the middle of April, why get in a rush to organize their documents in March?  If the taxpayer is using a paid preparer, then it's safe to assume the preparer is working on several returns at one time, which can create a time lag between when information is submitted and the return is done.  If the taxpayer expects to owe tax, the earlier the return is done, the better they will be able to do cash flow planning to make a tax payment by April 15.  On the other hand, if the taxpayer expects a refund, then the same holds true in that the earlier the return is done, the earlier the taxpayer gets their refund.  Finally, it is always safe for the taxpayer to leave some time in case there are questions or additional documents that need to be obtained.  

D.I.Y

Taxpayers that have simple tax situations or are familiar with preparing tax returns already might want to prepare their own taxes.  There are a variety of options for taxpayers that want to go this route.  Most of the programs on the market now are easy to use and will walk the taxpayer through the return in an "interview format".  The most popular programs are TurboTax and TaxACT, both of which are available on CD or as an internet download.  There are pros and cons to the DIY method.  The pros are that it is relatively inexpensive ($25-$50 for software and efiling), the returns can be done at the taxpayers convenience, and the taxpayer does not have to share sensitive personal and financial data with anyone else.  However, the cons are that the taxpayer could report an income or deduction item incorrectly and helpful, reliable information is hard to come by on the internet.  Both of these could result in the taxpayer paying too much tax or filing an incorrect tax return.  Depending on the complexity of the taxpayer's situation, a professional tax preparer should be consulted.