Haven’t Filed Your Taxes Yet? Act Soon to Avoid Penalties

It’s easy for taxes to get lost in the shuffle of life during a normal year. This past year, that shuffle was intensified by the stresses of a pandemic.

Thankfully, the IRS extended the deadline for paying 2020 taxes from April 15 to May 17, so people have a bit of extra time to get their paperwork in order.

But after that extended May 17 deadline, it will be business as usual: Late filings or payments could result in penalties and/or interest. Here’s what to expect if you’re running behind, and what you can do to mitigate the damage.

What happens if you file or pay late

If you file taxes late, the penalty is usually 5% of the tax you owe for each month your return is late (up to five months). For a return that’s more than 60 days late, the minimum penalty is $435 or the tax you owe, whichever is smaller. If you’re getting a refund from the IRS, on the other hand, then there’s no penalty for filing your return after the deadline (though that may not be true for state taxes). That said, you won’t receive the refund until you file.

If you pay taxes late, the IRS may charge interest on what you owe until the balance is paid in full.

What about consequences aside from fees? “It’s very hard to go to jail for not paying taxes,” says Chris Whalen, a certified public accountant in Red Bank, New Jersey. “You would have to owe a lot of money.” However, it is possible for the IRS to levy your paychecks or put a lien on your property if you don’t pay your tax debt. You’ll likely get several letters in the mail before that happens, so be sure to keep your address on file with the IRS up to date.

Want to avoid penalties? File on time

The easiest way to avoid penalties from the IRS is to file your taxes by the deadline, or get a tax extension if you won’t be able to do so. But there’s a key detail to know when it comes to filing an extension. “The most important thing to remember is that an extension of time to file a tax return is only an extension to file the paper,” Whalen says. “If you don’t pay any tax due, you’re going to get a late payment penalty.”

Because of this year’s extension, interest and penalties on unpaid balances won’t begin to accrue until May 17. According to Brian Miller, CPA and managing partner for Zuna Financial Services in Portland, Oregon, those penalties could be worse if you also don’t file your return on time. “If you didn’t file your taxes by the due date, the IRS is going to charge you a much higher tax percentage than if you file your taxes by the due date and just don’t pay on time,” Miller says.

Pay what you can, when you can

Once you’ve filed, try to pay your debt by the deadline since penalties and interest will start to accrue over time. If you can’t pay the balance, you can contact the IRS to set up a payment plan or offer in compromise. A payment plan, or installment agreement, lets you pay the taxes owed over a longer period of time. An offer in compromise lets you settle the tax debt for less than what you owe. Payment plans are more common and often easier to obtain than offers in compromise, and you can apply for a payment plan online.

Talk with a professional

If you owe money to the IRS, it can be intimidating to pick up the phone and ask what your options are, but according to Miller, that’s exactly what you should do.

It’s not just intimidation that keeps people from being proactive — often, taxpayers have trouble understanding the IRS, Miller says. “A lot of times it’s the verbiage accounting professionals use. And that’s why having a CPA call the IRS and work on their behalf is helpful, because we speak the same language.”

If you can’t afford to work with a tax professional, there are free tax help resources that may clarify what options would be right for you.

Alana Benson writes for NerdWallet. Email: abenson@nerdwallet.com.

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What to Do With Extra Money

This article provides information and education for investors. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks or securities.

Despite the massive economic toll the coronavirus pandemic has wreaked on many people, others may have added some unexpected cash to their bank accounts. According to a Pew Research Center study, about 42% of Americans say they’ve been spending less money since the start of the pandemic. Decreased spending, tax refunds, relief checks and unused vacation funds may have given you a surplus of cash — and a pending decision about what to do with it.

If you’ve accrued some extra cash because of the pandemic or another reason, here are six ways to use it to help take your finances to the next level.

1. Create or build up an emergency fund

If 2020 taught us anything, it’s that the unexpected can happen, and it pays to be ready for it. The first step you may want to take with any extra money is to ensure you have a financial cushion for when those unexpected events come around. To make this money extra effective, you can put your emergency fund into a high-yield savings account. That way, your cash may benefit from a higher interest rate, but you’ll still have quick access to it.

2. Get your 401(k) match

If you’ve been holding off on investing in your 401(k), now is the time to start — especially if your employer offers a match. Say your employer offers a full 3% match on your contributions and you make $50,000 a year. If you contribute 3% of your salary, or $1,500, your employer will also kick in $1,500, upping your total annual 401(k) contributions to $3,000. If you don’t have access to a 401(k), don’t worry. There are still plenty of ways to invest for your future.

3. Pay down high-interest debt

If you’ve got extra money lying around, you might as well use it to save yourself money in the future. If you carry a balance on a credit card or loan and have a high interest rate, your best investment may be to pay off that balance. Generally speaking, if your interest rate is higher than you can expect to earn in the stock market or any other investment, you may get a better return on your money by paying off that debt.

4. Start funding an IRA

If you don’t have a 401(k) or you’ve already contributed enough to get your employer’s matching contribution, consider investing through either a traditional or Roth IRA. Individual retirement accounts aren’t investments; they’re specific types of retirement accounts that come with tax advantages, which you can use to buy investments. Contributions to traditional IRAs are often tax-deductible, and Roth IRAs allow you to take out qualified distributions tax-free in retirement, which means you don’t pay taxes on your investment earnings. Once you fund an IRA at an online broker, you can start filling it with investments. It’s often considered a good idea to primarily invest in diversified funds such as mutual funds. Funds are made up of many different stocks or bonds, so if one company doesn’t perform well, your portfolio is buffered by the other companies you’re also invested in.

Both traditional and Roth IRAs have contribution limits, so you can contribute only a certain amount each year. For 2021, that amount is up to $6,000 (or $7,000 if you’re 50 or older). IRAs also have limitations on who can contribute. For both types of IRAs, you must have taxable compensation, and for Roth IRAs, you can contribute only if your modified adjusted gross income is below certain thresholds.

If you don’t want to choose your own investments, you can open an IRA with a robo-advisor. Robo-advisors use computer algorithms to build and manage an investment portfolio for you, usually for a fee of between 0.25% and 0.50% of your assets under management.

5. Save for your other money goals

According to the Pew Research Center, about half of nonretired Americans say that the economic impacts of the coronavirus pandemic will make it harder for them to achieve their financial goals.

Retirement isn’t the only thing in your future — take some time to outline what you want your money to do for you. Do you want to save for a down payment on a house, or start a college fund for your kids? Goals that are at least five years away can typically involve investing at least a portion of your savings so that money grows. For short-term goals, it’s often wise to keep the money close at hand in a savings account where you won’t risk losing your principal.

6. Explore additional investment options

Once you have investments that set you up for the long term, you may want to start expanding your repertoire.

If you’re looking to buy individual stocks, you can research companies you’re excited about and believe will perform well in the future. If you’re interested in real estate, you could explore investing in real estate investment trusts. REITs are companies that own or finance income-producing real estate. Many REITs trade on stock exchanges, so you can buy them within your IRA or a taxable brokerage account.

To have your investment dollars go toward causes you care about, you can look into sustainable ESG investments. If you’re intrigued by the constantly evolving space of alternative investments, you could consider cryptocurrency.

While these investments may be more exciting than your other investments, they should generally make up only a small percentage of your portfolio — they often carry a higher degree of risk than more diversified investments like mutual funds.

Alana Benson writes for NerdWallet. Email: abenson@nerdwallet.com.

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5 Options for People Who Can’t Afford Their Tax Bills

If you know you’re getting a refund come tax time, filing your taxes can almost feel fun. But if you suspect you’re going to owe the IRS money you don’t have, it can be hard to even start the process.

According to a NerdWallet survey, of those who failed to file by last year’s extended July 15, 2020, deadline, 24% knew they owed money but were unable to pay, and 18% didn’t know if they owed, but were afraid to receive a bill they couldn’t pay.

The tax bill you know is better than the tax bill you don’t

Like most problems, stuffing your tax bill in a drawer and forgetting about it won’t make it go away.

If filing your taxes to begin with is burdensome, it may be possible to get help. The federal government has a few programs to offer free tax help to qualified individuals, such as Volunteer Income Tax Assistance and Tax Counseling for the Elderly. Many tax providers also offer a free version of their software for those with simple tax situations, and the IRS itself offers a free file program to those who qualify.

But if you’re pushing off filing because you’re concerned about owing taxes, you should understand your options for tax relief. Here are five ways to get some tax debt help.

1. Pay what you can

No matter what you owe, you should still try to file on time (or file an extension if you can’t make the deadline). Filing an extension will give you more time to file your taxes, not more time to pay your bill, but skipping the extension can lead to harsher penalties.

If you don’t pay your taxes, the IRS charges interest on what you owe. You may not be able to afford your whole tax bill, but if you pay a portion of that bill, you’ll cut down on the amount of interest you’ll have to pay on the rest of your owed taxes.

2. Consider an IRS payment plan

An IRS payment plan, also called an installment agreement, allows you to pay the taxes you owe within an extended time frame.

According to Jordie V. Neth, a certified public accountant and owner of RainCity CPA in Seattle, once you set a monthly payment plan, you can’t renegotiate those payments. “The IRS allows you to pay it off over [up to] 72 months. If you do that option, you can always pay extra, but you can never pay less,” Neth says.

Neth recommends breaking your payments over the longest possible time frame so they are set at the lowest possible amount. “That way, if push comes to shove and you’re in a hardship, you actually have the ability to pay the minimal amount due for any given month,” Neth says.

Keep in mind, a payment plan will incur some interest and penalty charges. You may also have to pay a processing fee for using a debit or credit card and a setup fee, depending on the length of your payment plan and whether or not you apply online.

3. Apply for an offer in compromise

An offer in compromise lets you settle your tax debt. According to Tina Pittman, a CPA and owner of Your Accountant in Chambersburg, Pennsylvania, one of the major benefits of an offer in compromise is that you will end up paying less than what you really owe. Pittman says there are other benefits to an offer in compromise as well, such as avoiding collection calls and letters from the IRS.

Applying for an offer in compromise is a long process that involves a lot of documentation to prove you can’t afford your tax bill, a $205 application fee and an initial payment toward your bill. While your application is being considered, your payments and fees will be applied to your balance, which you will still need to pay off eventually — even if the IRS agrees to reduce it.

Keep in mind, the IRS rejects most applications for offers in compromise. In this case, your initial payment will likely be applied to your balance. Your application fee may be refundable in certain situations.

If you meet the low-income certification requirements, you may not need to pay the application fee or initial payment. You also won’t need to make monthly payments while your offer is being evaluated.

4. Ask for a ‘currently not collectible’ status

Those who can’t pay their tax bill may ask to be put into “currently not collectible” status by the IRS. This means the IRS will temporarily delay collection until your financial situation improves. Keep in mind that this is just a temporary label the IRS puts on your account; the status is not permanent, and you will eventually need to pay your tax debt. (The IRS can also still file a lien against you while you have this status.)

To obtain a currently not collectible status, you’ll need to fill out a form and provide information about your assets, monthly income and expenses.

5. Consult a specialist if you can

Pittman advises people to see a tax professional before taking action with the IRS.

“People are not aware that there are different options with the IRS. They automatically assume all they have is the installment agreement, on which you have to pay the penalties and interest.”

If you can’t afford to work with a tax professional, there are resources for free tax help that may clarify what options would be right for you.

Alana Benson writes for NerdWallet. Email: abenson@nerdwallet.com.

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If Doing Less Means Saving More, Try These 5 Money Moves

The coronavirus has upended countless jobs, schools and bank accounts. But while undoubtedly more people are struggling than not, those who are still working may have seen their expenses actually drop, due to canceled travel, limited dining options and more time at home.

If you’ve managed to end up with extra money during the pandemic, here’s how to take advantage of those savings.

1. Start or fill out an emergency fund

2020 has served as a stark reminder that unexpected things can happen, and when they do, it’s a good idea to be prepared.

“We say if you have a steady job, your contingency fund should be three to six months of expenses,” says Tara Unverzagt, certified financial planner and founder of South Bay Financial Partners in Torrance, California. “I would bulk it up even more because of uncertainty. I’ve never known anyone to be upset because they had too much cash, but have known lots of people who were upset they didn’t have enough.”

That level of savings is a stretch goal for many people; an extended period of reduced expenses may provide you with the opportunity to finally reach it. Establishing an emergency fund is one of the best things you can do for your future self, and if you put it in a high-yield online savings account, it will benefit from a higher interest rate than a regular savings account.

You don’t want to invest your emergency fund because your primary goal for that money is accessibility, not growth. The stock market goes up and down, and there’s a real risk that it could go down just when you need the money. At best, that could mean having to sell your investments at a loss to pull cash out. At worst, it could mean your money won’t be there when you need it most.

2. Invest for retirement

If you haven’t ventured into the world of investing yet, it may feel like a scary time to start given all the volatility in the market lately. The good news is that volatility doesn’t cause much harm when you’re investing for a long-term goal like retirement: The peaks and valleys due to the coronavirus will likely appear much smaller over time.

If you haven’t started investing, there are two easy jumping-off points: your employer’s 401(k) if it offers one and an IRA. Both are accounts that can help you invest for retirement with some tax benefits. Roth IRAs, for instance, allow your money to grow and be taken out in retirement tax-free.

Even if you’re already contributing to a 401(k) or an IRA, you may want to consider upping that contribution. Every extra bit you can put toward retirement goes a long way. Let’s say your reduced expenses mean you can save an extra $500 a month over the next year. If you have 30 years until retirement and you earn a 6% return, that $6,000 you invest could add over $34,000 to your retirement balance — a significant boost.

And because you can always change how much you’re contributing, you can decrease the amount you’re putting toward retirement if and when your spending habits return to normal.

3. Save for nonretirement goals

Retirement is a common goal, but it likely isn’t the only one you have. If you’re on track for retirement, consider putting extra funds toward other things: college for your kids, a new car or a dream vacation (which you’ll have plenty of time to save for, since most people aren’t traveling right now).

Investing can help you achieve those goals faster than just saving, but keep in mind that you generally don’t want to invest money you’ll need within five years. (Like an emergency fund, savings for near-term goals should go into safer options, like a high-yield savings account). On the other hand, if you’re starting a college fund for a newborn, that money will have approximately 18 years to take advantage of the market’s returns.

If you’ve found yourself in a position of privilege during this global pandemic and have been able to save some extra money, you may also want to consider increasing your charitable contributions. Keep in mind, you may be able to deduct your charitable donations when tax time rolls around.

4. Explore real estate investments

If you’re interested in investing in real estate, you don’t have to start renovating an old barn or putting up shiplap. One of the easiest ways to invest in real estate is to invest in real estate investment trusts. REITs are companies that own (and sometimes operate) real estate that generates income, such as apartment buildings. Publicly traded REITs are bought and sold on exchanges, just like stocks, and have similar liquidity, meaning you can sell them with relative ease.

5. Get some help

When you suddenly find yourself with extra money, it can be difficult to figure out the best way to put it to use. Financial advice is widely available these days, and it’s often inexpensive. Online financial advisors and robo-advisors have brought the cost of investment management and financial planning down significantly, and both are good options for when you’re feeling lost.

These advisors can also help you stay hands-off with your portfolio during turbulent times in the market by ensuring that your investments are aligned with your risk tolerance. Robo-advisors offer investment management and typically charge between 0.25% and 0.50% of your assets per year. If you need assistance developing a more comprehensive financial plan in addition to investment management, it may be a good idea to enlist the help of a financial advisor.

Alana Benson is a writer at NerdWallet. Email: abenson@nerdwallet.com.

The article If Doing Less Means Saving More, Try These 5 Money Moves originally appeared on NerdWallet.

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Let a Playlist Help You Make Good Money Moves

Next time you’re looking for financial advice, ignore your opinionated uncle and turn on Spotify.

Over the decades, many pop stars, and rock, country and rap artists have offered catchy advice that can remind you to stick to your personal finance goals. Below, we rank some of the best:

1. ‘Diversify your bonds’ —Wu-Tang Clan

Made famous by the “Wu-Tang Financial” sketch on “Chappelle’s Show,” this line gives some sage advice: Diversification is one of the most important aspects of investing.

If you invest all your money into a single stock or bond and that investment loses its value, you’ll be out some serious cash. When you diversify, you spread your money across not just different types of investments — like stocks and bonds — but also across investments from various industries and geographic locations. Diversifying is one of the best ways to safeguard your investment portfolio against risk.

If you’re not sure how to diversify your assets or would like some help, think about using a robo-advisor. Robo-advisors are automated investing services that help you choose investments and manage your portfolio. They’re cheaper than human financial advisors, and you don’t have to worry about managing your investments yourself.

2. ‘Floss a lil’, invest up in a mutual fund’ —Busta Rhymes

One way to diversify your portfolio is through mutual funds. Unlike stocks, which are investments in a single company, mutual funds are portfolios of investments — one mutual fund might hold hundreds of different stocks or bonds. Mutual funds can help investors quickly and easily diversify their portfolio and avoid having to pick individual stocks themselves.

You will pay an annual fee to invest in a mutual fund, but there are ways to cut costs. One is choosing an inexpensive type of mutual fund called an index fund, which invests in an entire stock market index — for example, the S&P 500.

3. ‘If they can’t raise my interest then I have to let them be’ —Madonna

Preach, Madonna. If your precious cash is sitting in a traditional brick-and-mortar savings account, it’s time to change it up: Think about opening a high-yield savings account. Many offer rates even a Material Girl would approve of: Currently, 1.60% or more, which is significantly higher than the national average savings account rate of 0.09%. Cash management accounts, which are offered by investment firms like online brokers and robo-advisors, are similar to savings accounts and also offer high interest rates.

4. ‘Grab that cash with both hands and make a stash’ —Pink Floyd

This may be obvious (and easier to do when you’re ultra-famous), but Pink Floyd has a point. Making money and putting it away is the basis of any saving or investment advice. From cutting your cable bill to making a budget to refinancing a loan, there are lots of ways to “grab that cash,” even when things feel tight.

Then you have to put that cash away. If you keep the money you save in your checking account, it may not stay saved for long. Having a dedicated savings or investment account can help you safeguard your money and keep yourself from spending it. Some employers even let you split your direct deposit between different accounts. If you can, arrange to have a portion of each paycheck go directly to savings.

5. ‘Lousy pay, there ain’t no 401(k), I know this may come as a shock, but this here’s a full-time job’ —Gretchen Wilson

Gretchen Wilson’s country ode to the trials of being a mother points out the obvious about unpaid work (often) performed by women: There’s no paycheck, and there are no benefits. Stay-at-home parents should treat the work they do like any other full-time job and think about saving for retirement. There may be no 401(k), but you can open a spousal IRA.

An IRA is a retirement account you open on your own. Because of the tax advantages, IRAs typically require contributors to have earned income; however, spousal IRAs allow you to contribute based on your spouse’s income, as long as you file taxes jointly and your spouse makes enough to cover your contribution. (Here’s more about spousal IRAs and how they work.) Single parents can contribute to IRAs as well, as long as they have earned income.

6. ‘Whoever said money can’t solve your problems must not have had enough money to solve ’em’ —Ariana Grande

Grande’s theory is partly true: Buying stuff you don’t need may not make you any happier, but having enough money for your needs (and at least some of your wants) alleviates stress and can help you achieve a better quality of life.

The key is to recognize what “enough” means to you so you’re not constantly striving for more. For most people, “enough” doesn’t mean a bigger house or a fancy car. It means having an emergency fund to fall back on, or not having to stress about retirement. That kind of financial security is a surefire way to buy yourself some happiness.

Alana Benson is a writer at NerdWallet. Email: abenson@nerdwallet.com.

The article Let a Playlist Help You Make Good Money Moves originally appeared on NerdWallet.

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