Last Updated Apr 5, 2010 3:43 PM EDT
It's estimated that more than 15.4 million taxpayers could owe taxes because of this credit, according to a report by the Treasury inspector General for Tax Administration. This is happening because last year, the government directed employers to decrease the Federal income tax withholding from the paychecks of millions of workers in anticipation of these taxpayers applying for the Making Work Pay Credit on their 2009 tax return. The problem is that the decrease in tax withholding was, for many workers, more that the tax credit they receive. As a result, many folks will ultimately owe taxes when filing their 2009 tax returns. If folks are not financially prepared and cannot pay, they could incur tax penalties and interest for not paying on time.
Folks most likely to fall into this trap are those who work two jobs, married couples in which both spouses work, and individuals who work and are also claimed as dependents. According to the report, the amounts owed could range from $200 to over $1,000.
Always File On Time
Even if you cannot pay some or all of your taxes owed, you should always file your tax return (or application for an extension) on time. The penalty for not filing late is a stiff 5 percent per month up to a maximum of 25 percent of the amount of tax due on the late-filed return.
If you file your tax return (or an extension) on time, but you don't have enough money to pay your taxes in full, the penalty for paying late is much less onerous at 0.5% percent per month (also up to a maximum of 25 percent of the amount due on the return). Suffice it to say, filing and paying late can get expensive. But if you don't pay at all, the IRS will not go lightly on you -- they'll typically commence a collection action to garnish your wages and place liens on your property for the amount of the unpaid taxes, penalties, and interest.
So what do you do if you can't pay the full amount of taxes due? Alternatives include seeking a loan from bank or credit union. But if you can't afford to pay the taxes you owe, then you probably are not going to be able to get a loan. One option: ask for a loan from a relative or friend. Or you could tap a home equity line of credit, if that is available. Current interest rates on home equity lines are low and repayment terms are flexible.
You can also pay your taxes using your debit or credit card. Using this option will avoid the IRS penalties for not paying at all, but you'll incur convenience fees in the range of 2% to 4% of the amount charged. And if you don't pay your credit card balance in full when the amount is due, you could end up paying hundreds of dollars of interest on the balance you carry on your credit card at a rate that is higher than the IRS interest rate for installment payments.
The IRS also offers a few payment options for folks who can only afford to pay over time. Read my blog later this week for more on these.