Parents, did you know your kids can help you save money on your taxes? Donât miss out on filing for these tax credits for kids.
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The rule of 55 is a provision in the Internal Revenue Code that allows workers to withdraw money from their employer-sponsored retirement plan without a penalty once they reach age 55. Distributions are still taxable as income but there’s no additional 10% early withdrawal penalty. The IRS rule of 55 applies to 401(k) and 403(b) […]
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A salary reduction contribution plan allows employees to reduce their taxable income by investing for retirement. So an employeeâs salary isnât really reduced; rather the employer deducts a percentage of their salary and deposits the funds in a retirement savings plan so the money can grow tax deferred. Common employer-sponsored retirement plans include 401(k)s, 403(b)s, […]
The post What Is a Salary Reduction Contribution Plan? appeared first on SoFi.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
The United States income tax system operates on a pay-as-you-go basis, with taxes due periodically throughout the year as you receive income, even though you file a tax return only once each year. When you’re working, your employer withholds income taxes from your paycheck and sends it to the IRS on your behalf. For most people, that takes care of the periodic payment requirement. But when you retire, it’s generally up to you to make sure Uncle Sam gets his cut from your Social Security benefits and taxable retirement account distributions.
You have two ways to satisfy the year-round tax payment obligation for retirement income. Taxes can be withheld from your benefits and distributions, or you can make estimated tax payments to the IRS. You can mix and match if you want, but just make sure you pay enough during the year to avoid an IRS underpayment penalty. There’s no penalty if you owe less than $1,000 in tax when you file your return. You’ll also avoid the penalty if your withholding and estimated tax payments equal at least 90% of your tax liability for the year, 100% of the tax shown on your tax return for the previous year, or 110% of the tax shown on the previous year’s return if your adjusted gross income for that year was more than $150,000.
If you receive periodic payments from a 401(k) plan, pension or traditional IRA, income taxes are automatically withheld from those payments as if they were wages. (Periodic payments are made at regular intervals for at least one year.) You can, however, adjust the amount of tax that is withheld, or cut off withholding altogether, by completing IRS Form W-4P and giving it to the payer. But you generally can’t request zero withholding for payments sent outside the U.S. and its territories.
For nonperiodic payments from pensions or retirement accounts, 10% is automatically withheld from the taxable portion of the payment unless you request a different percentage using Form W-4R. (Again, give it to the plan, pension or IRA custodian.) Withholding generally can’t dip below 10% for nonperiodic payments sent abroad.
There’s a special rule for 401(k) or pension plan distributions paid directly to you if the payment is eligible for a tax-free rollover to an IRA or other eligible retirement plan. In that case, the plan administrator must withhold a flat 20% for taxes. You can avoid the 20% withholding by having the money sent directly to the rollover IRA or another eligible account. Taxes won’t be withheld from Roth account distributions because those payments aren’t taxable.
When it comes to Social Security benefits, there’s no automatic withholding. Instead, you must request withholding at a rate of 7%, 10%, 12% or 22% by filing Form W-4V if you want taxes paid upfront. But, again, don’t send the form to the IRS. Instead, mail it to your local Social Security office.
You can also pay estimated taxes directly to the IRS on a quarterly basis using Form 1040-ES. For the 2022 tax year, the first three payments are due April 18, June 15 and Sept. 15 of this year. The fourth payment is due Jan. 17, 2023. No final payment is needed if you file your 2022 tax return by Jan. 31, 2023, and pay the entire balance due with your return.
A worksheet in the instructions for Form 1040-ES can help you calculate the amount of your estimated payments. If your original estimate is too high or too low, simply submit another Form 1040-ES to readjust later payments. You should also recalculate the payment amount if your financial situation changes — or the tax law does — and it affects your tax liability for the year.
The IRS gives you many ways to pay estimated taxes: check, cash, money order, credit card or debit card. There are several online payment options, too. For details, check the instructions for Form 1040-ES.
Your state may want to collect taxes throughout the year, too. Check with your state’s tax agency to learn about its withholding and estimated tax payment requirements. Although some plan administrators and IRA custodians may be able to withhold state taxes for you, Social Security won’t give you that option.
For most Americans, the due date for filing your 2021 tax return is April 18, which means you don’t have much time to file your return before the deadline expires. (Some people have more time to file their tax return.) But what if, for whatever reason, you just can’t file your return on time? Don’t worry â it’s easy to get a tax extension so that you don’t have to file your return until October 17. And you don’t even need to have a good excuse or explain why you need more time. All you have to do is follow a few simple steps.
But make sure you understand that an extension to file doesn’t extend the time to pay any tax due. If you don’t pay your estimated tax due by the April 18 tax return filing deadline, the IRS will charge you interest on the unpaid balance (even if you had a good reason for not paying on time). They can also tack on additional penalties for filing and paying late. Don’t get caught in that trap!
There are two ways to request an automatic six-month extension: File Form 4868 or make an electronic tax payment. Either way, you need to act by your tax return filing deadline.
You can file Form 4868 by mail or electronically. If you mail a paper version of the form to the IRS, it must be postmarked by the regular due date of your return. If you’re mailing a payment, you must use the U.S. Postal Service to mail the form, since it must be delivered to a P.O. box (private delivery services can’t deliver items to IRS P.O. boxes). If you’re not making a payment, you can use certain private delivery services to mail the form. If you submit the form electronically â either on your own computer or through a tax professional â have a copy of your 2020 tax return handy, since you’ll be asked to provide information from that return to verify your identity. If you want to save a few bucks, use the IRS Free File or Free File Fillable Forms to prepare and e-file the form at no cost. Both are available on the IRS website.
The other way to get an automatic tax filing extension is by making an electronic tax payment by your regular tax return filing deadline. Simply pay all or part of your estimated income tax due using the IRS Direct Pay service (payment directly from a bank account), the Electronic Federal Tax Payment System, a credit or debit card (processing fees may apply), or a digital wallet such a PayPal and Click to Pay. You’ll also need to indicate that the payment is for a tax extension. Make sure you keep the confirmation number for your payment, too. Start at the IRS’s “Paying Your Taxes” website to make an electronic federal tax payment. You don’t have to file a separate Form 4868 when making an electronic payment and indicating it’s for an extension â the IRS will automatically treat it as an extension request.
With either of these two methods, you won’t receive any notice of approval from the IRS. But the IRS will let you know if your request for a filing extension is denied because it was too late.
When you eventually file your extended tax return, enter the amount you paid with your extension request on Line 10 of Schedule 3 (Form 1040). That way you’ll get credit for the payment and can subtract it from the tax due as shown on the return.
There are several special rules for U.S. citizens living outside the country. First, you’re allowed an automatic extension to June 15 to file your return and pay your taxes if you’re a U.S. citizen or resident alien and, on the regular due date of your return, you’re (1) living out of the country and your main place of business or duty post is also outside the U.S. and Puerto Rico, or (2) serving in the military on duty outside the U.S. and Puerto Rico. You don’t need to file Form 4868 to get this tax extension, but you must attach a statement explaining which of the two situations described above applies to you when you eventually file your return. If you’re married and filing a joint return, either you or your spouse can qualify for this extension. However, if you and your spouse file separate returns, this extension only applies only to the spouse who qualifies for it. (Caution: Even though taxpayers living abroad can get an extra two months to pay any tax due without incurring a penalty, interest still applies to payments received after your regular filing due date.)
Taxpayers living abroad who can’t file their return by June 15 can still get an additional four months to file their return like everyone else. That will extend this year’s filing date to October 17, 2022. You have to request this tax filing extension no later than June 15 by filing Form 4868. (Make sure you check the box on line 8 of the form.) This filing extension does not extend the time to pay your tax.
Taxpayers who are out of the country can also request an additional, discretionary two-month filing extension. This will take you to December 15, 2022. To get this tax extension for a 2021 tax return, you must send the IRS a letter by October 17, 2022, explaining the reasons why you need the additional two months. Send the letter to:
  Department of the Treasury
  Internal Revenue Service
  Austin, TX 73301-0045
The IRS will let you know if the request is denied. If you don’t hear back from them, you’re good to go.
And there’s more! If you’re outside the U.S., you can also request a tax filing extension beyond October 17 if you need time to meet certain tests to qualify for an exclusion or deduction for foreign earned income or housing. This extension will generally be for 30 days beyond the date that you reasonably expect to qualify for the exclusion or deduction. To request this tax extension, file Form 2350 with the IRS by the due date for filing your return. Generally, if both your tax home and your abode are outside the U.S. and Puerto Rico on the regular due date of your return, the due date for filing your return for purposes of this extension is June 15. If you’re granted this tax filing extension, you can’t also get the discretionary two-month additional extension mentioned above.
The deadline for filing your tax return and paying your tax is automatically extended if you serve in a combat zone or contingency operation. There’s a two-step process for figuring the length of this type of tax extension. First, your deadline is extended for 180 days after (1) the last day you’re in a combat zone, have qualifying service outside of the combat zone, or serve in a contingency operation; or (2) the last day of any continuous hospitalization for an injury from service in the combat zone or contingency operation, or while performing qualifying service outside of the combat zone. Use whichever of these two dates is the latest.
Second, your deadline also is extended beyond 180 days by the number of days you had left to take action with the IRS when you entered the combat zone. For example, you have roughly 3½ months (January 1 to April 18) to file your tax return. Any days left in this period when you entered the combat zone (or the entire 3½ months if you entered it before the beginning of the year) are added to the 180 days.
Spouses of military personnel who served in a combat zone or contingency operation are generally entitled to this extension, too. However, the extension doesn’t apply to a spouse for any tax year beginning more than two years after the area in question ceases to be a combat zone or an operation ceases to be a contingency operation. It also doesn’t apply to a spouse for any period the service member is hospitalized in the U.S. for injuries incurred in a combat zone or contingency operation.
This tax extension isn’t just for military personnel, either. It can be claimed by merchant marines on ships under the Department of Defense’s control, Red Cross personnel, war correspondents and civilians supporting the military.
Your state may have different rules and due dates for extending state income tax returns. So, be sure to check with your state’s tax agency to see how tax return filing and payment extensions work where you live.
The IRS has granted victims of a recent natural disaster in Puerto Rico more time to file various individual and business tax returns and make tax payments. Specifically, victims of the severe storms, flooding and landslides that began on February 4, 2022, now have until June 15, 2022, to file and pay tax returns and payments due between February 4 and June 14.
The tax relief is available to anyone in any area designated by the Federal Emergency Management Agency (FEMA) as qualifying for individual assistance. At this point, only affected taxpayers who live or have a business in Cataño, Dorado, Toa Baja, Vega Alta and Vega Baja qualify for the extensions, but the IRS will offer the same relief to any taxpayers in other Puerto Rico localities designated by FEMA later.
The IRS will also work with other people who live outside the disaster area but whose tax records are in the disaster area. Call the IRS at 866-562-5227 if you face this situation. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization and anyone visiting the impacted area who was killed or injured as a result of the disaster.
The deadlines that are pushed back include the April 18, 2022, due date for filing a 2021 personal income tax return and paying 2021 taxes, and various business returns normally due March 15 and April 18. Storm victims in the designated area will also have until June 15 to make 2021 IRA contributions.
Puerto Rico storm victims will also get more time to make the first quarterly estimated tax payment for the year that’s due on April 18, 2022. In addition, farmers who would normally skip estimated payments and file their returns by March 1, 2022, can now wait until June 15 to file their 2021 return and pay any tax due.
The due date for quarterly payroll and excise tax returns normally due on May 2, 2022, are extended to June 15 for Puerto Rico storm victims, too. Penalties on payroll and excise tax deposits due from February 4 to February 21 will also be waived as long as the deposits were made by February 22, 2022.
Taxpayers don’t need to contact the IRS to get this relief. However, if an affected person receives a late filing or late payment penalty notice from the IRS, he or she should call the number on the notice to have the penalty abated.
Victims of the Puerto Rico storms, flooding and landslides may be able to claim a tax deduction for unreimbursed damaged or lost property. To do so, they typically must itemize and file Schedule A with their tax return. However, victims who claim the standard deduction may still be able to deduct their losses if they can claim them as business losses on Schedule C.
The deduction can be claimed on the tax return for the year the damage or loss of property occurred or for the previous year. So, for any damage or loss in 2022, the deduction can be claimed on either a 2021 tax year return or a 2022 return. In either case, you must write the FEMA declaration number on the return claiming the deduction. For the recent Puerto Rico storms, flooding and landslides, the number is DR-4649-PR.
If you decide to claim a deduction for 2021 and you have already filed your 2021 tax return, you can amend your 2021 return by filing Form 1040X. For this purpose, you must file the amended return no later than six months after the due date for filing your return (without extensions) for the year in which the loss took place. So, for Puerto Rico storms, flooding and landslide losses in 2022, you would need to file an amended 2021 return by October 16, 2023. Affected taxpayers claiming the disaster loss on an amended 2021 return should also put the Disaster Designation (“Puerto Rico Severe Storm, Flooding, and Landslides”) in bold letters at the top of the form. See IRS Publication 547 for details.
Itâs the most wonderful time of the year: tax season! All jokes aside, a 2020 study found that the majority of taxpayers dread doing their taxes. Taxes take time, can cost money, and many people find them confusing. Theyâre basically like homework for adults.
But taxes donât need to be so terrible. Through years of experience and repetition, I have gained efficiencies to speed up the process. While you may not be at that level, here are seven ways to be more organized for tax season â so you can stop dreading the paperwork and get back to your life. Â
Collect all tax-related information in one place as it arrives. When you receive an envelope in the mail with a tax document enclosed, add it to that spot immediately. Youâll be able to easily find it later on, which will help make your tax filing a smoother process.Â
Keep previous yearsâ tax information in a central location. In most circumstances, your tax filing this year will be largely similar to the previous year. For this reason you may want to reference previous tax documents to confirm specific numbers or even to see which documents were relevant. You can store your tax information in a folder on a bookshelf, a file in your safe, or even a âBox of Knowledgeâ in the closet. Pick one and stick with it.Â
If you are technically inclined, get your tax statements electronically. Itâll be faster, better for document retention, and help you streamline your taxes in future years.Â
Think about where your money is stored and any companies that may have a long-term relationship with your money. Check each of these places for tax-related information. For reference, if you have any of the following, you may need a related tax statement for each:Â
The sooner your taxes are filed, the surer you can be that they were submitted properly ahead of the deadline and that you wonât get any surprises from the IRS later on. Filing earlier may also lead to a quicker turn-around time on your refund.Â
If youâre dying to know the status of your refund, the IRS has an online tool for that: the âWhereâs My Refundâ portal. Otherwise, if you have a tax question, it can be difficult to get a hold of the IRS. They are understaffed, catching up with many rule changes, and processing a lot of tax documents â including from the 2020 tax season. For this reason, you may receive a letter from the IRS that doesnât make sense. Donât panic. Thereâs probably a good explanation for it.
If you need to call them with a question, be patient and expect a long wait time. You can also check the IRS website to access tax records, see whether you owe the IRS any payments and whether they have processed your payments or tax returns.Â
The IRS doesnât want to see mistakes on tax forms. If they catch a mistake on your form, it could cost you time, money and stress to get it resolved. Many tax-filing software programs are good for straightforward circumstances, but you may not receive the full refund you deserve. Being a business owner, having a higher income, and investing are among the factors that could complicate your tax-filing status.
The more complicated your taxes are, the more it makes sense to find a tax preparer (the IRS also has a preparer directory). A tax preparer or tax adviser can ensure your taxes are filed properly, that you take advantage of tax breaks when available, and can also correct mistakes with the IRS on your behalf. Itâs a win-win!
Taxes donât have to be scary ⦠they only come once a year. They are not meant for you to panic or have anxiety. Being organized and a little professional help can take that stress away. Find a strategy that works for you.Â
The earned income tax credit could net you a bigger tax refund if you earned money in 2019, but not a whole lot â particularly if you have children.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
Wondering when you need to change your tax withholdings â and how to actually do so? We break it all down quicker than you can say âW-4.â
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.