Help a Reader: Paying for Taxes

Here's an email I recently received:

I haven't finished my tax return for 2008 yet, but from the way things are looking, I'm going to owe money.  This is the first time I've ever owed money, as before I always got a pretty hefty refund.  Anyway, right now the amount looks like I owe just under $900.  There are a few other deductions I need to enter but I don't think they'll affect the final number very much.
 
What do I do?  I didn't plan for this at all - so there is no money set aside for it.  Any money I do have is going toward rent, bills, and debt.  I do not see how I can possibly set aside close to $900 by April 30, 2009 (Canada Revenue Agency's deadline).  My credit score is not good enough to borrow money (otherwise I would try to get a line of credit, but it would be for more than just paying the taxman), plus I don't think I like the idea of borrowing money to pay taxes.
 
The solution for next year is to just "set aside money" but that's easier said than done.  I had no idea I was underpaying my income tax throughout 2008, so how would I have known to set aside money?  Same thing for this year - how the heck do I know?

Any suggestions for him?

Comments

[RBJ]

The IRS provides an online "IRS Withholding Calculator" which helps you determine your tax designation for the year (Google it). Hopefully the CRA has something similar.

You may be able to delay the payment, I'm not certain.

Chalk this up as a lesson learned.

[Bill]

We had the same problem last year. Luckily we had a bonus coming in at the right time to pay. Does Canada have an option to extend? THat would buy you 3-4 months to come up with the money. As for next year, change your deduction amount ASAP so you don't have the same problem next year.

[JimL]

You need to do what it takes to pay this off. Sell off anything that you can. Pick up a quick part-time job delivering pizzas or whatever else you can find. There are no quick fixes beyond these.

[Matt]

I have owed money in the past and have just paid it and sucked it up, even though it wasn't expected. Sometimes it is hard to expect when you are going to owe. i.e. this year, I thought I was going to get a tidy little refund, but due to a new job and not being able to predict how taxable benefits and bonuses affect my income reporting, I owe about the same amount I thought I would get for a refund. Luckily I had more than that saved and well, I thought that was going to be a good head start for my vacation fund, but it just means that it won't be! I will still be having a few nice vacations this year regardless.

But back to the post. Contact CRA, look at their website. I am sure you can make arrangements with them to pay via installments, although they usually reserve this for high income folks, and especially retirees who are drawing income through investments (i.e. interest, dividends, capital gains).

All in all though, it is better to owe than to have the government owe you.

[George]

You have about six weeks to do the following:

1) Sell stuff
2) Get a second job
3) Get a loan

If at all possible, pay the taxes due before the deadline. If you're paying any extra (beyond minimum payments) on your debts, redirect that money and use it for the tax bill.

You do NOT want the tax man coming after you for unpaid taxes. He has massive authority to take your money, and will use it. It's a pain in the butt to deal with, and almost anything else (up to and even including getting a loan from a family member) is a better option.

A lesson to be learned from this question, though: HAVE AN EMERGENCY FUND. This is EXACTLY what it's meant for.

[Apex]

If this person got a refund every other year and owes 900 in 2008, something quite significant clearly changed. It's impossible to give advice on how "he would know" unless he can provide the details of what is different about his income and expense situation from 2007 to 2008. If he is willing to add a comment that describes that it would be quite possible to give him some advice on how to be prepared so this doesn't happen again.

Generically if he uses Turbo tax one easy way to keep on top of things is to just create a new turbo tax return using last years software and this years expect income/expense situation. If something changes such as a raise/bonus/windfall income or extra deductable expenses or loss of expenses throughout the year you update it and see where you stand. You have to know what your end of year income/expenses are likely to look like to get it right though. If you are not sure you want to with-hold conservatively.

If most all of your income is W2 income with very similiar expense situation to the previous year then whatever your previous year W4 looked like should be correct for the next year if you got a refund. However since you had such a drastic change that can't be the case, so again, something changed. Explain that and I am sure we can point out where you went wrong.

[Dan]

I set up a spreadsheet that functions like a "live" tax return that updates my tax liability each year in real time. I use the tax tables provided by the IRS, then plug in my expected net earnings, deductions, etc. Then if my situation changes, I update the spreadsheet and it re-figures my tax on the spot so I know whether to adjust withholding. That might be more work than most people want to do, but really it's just an initial investment of time up front and minimal maintenance on an ongoing basis.

As to your immediate $900 problem, can you tap an emergency fund, and take a few months to pay it back?

[Bob]

While I don't know the tax laws in Canada, I would suggest filing on time and paying what you can to keep the penalty and interest you will owe to a minimum. Then, do as is suggested above and do whatever you have to do to raise the extra money. You will be surprised what you can do if you make it a priority.

[scott neumyer]

Maybe he can get a job delivering pizzas for a few weeks to get a little extra money to pay it off.

[Jennifer]

There are a couple of things you need to do:
1) You need to contact CRA and find out if they have an installment plan. The IRS will do a payment plan with you. See if your tax entity will as well.

2) Did you change jobs or have a change in income? Did you change your filing status or your withholding? Did you win some money from a contest, receive a bigger bonus or something? If you were getting refunds previously and you aren't this year, then your income has changed, your deductions have changed or you are forgetting to input something. Double check your filing status and withholding and compare this year's charity and other deductions with prior years to find the difference.

3) When possible, set up an emergency fund, even if all you have in it is $500-$1000 to begin, when these things happen you can cover it. I like Dave Ramsey's idea of saving the first $1000 before you pay off debt so when emergencies come up you can pay for it. Before you go back to your debt snowball or reductions, build the emergency fund back up.

[Arlene]

My advice to him would be to file the return on time so he does not get a late-filing penalty. If he can't pay by April 30th that is ok, he will have to incur some interest and penalties but can avoid the late filing penalty if he files on time.

He can make payments anytime during the year to pay his tax owing, by sending cheques to CCRA or paying at the bank (you will need a remittance form to pay at the bank, usually one is included when they mail you your tax package) If you will be recieving a GST rebate this year, they make take it to pay your tax owing, especially if you are making payments for you tax owing.

I'm not sure about Child Tax Benefits, they probably won't take those unless it is obvious you aren't trying to pay your tax owing.

If you really in a bind financially and can not make the payments your best option may be to contact the CCRA and let them know your situation, so arrangements can be made.

[Dave]

I believe you can get an extension on payment of taxes. But there's a special form you need to fill out and you may need to pay a moderate interest on the taxes owed. It's fairly basic. Go to www.irs.gov and spend an afternoon researching the website. It's not difficult to find the information you need. Or contact a CPA. Even H&R Block can do the trick on this one.

[Matt]

It is kind of interesting to see the responses here as they pertain to people's experiences and impressions of the IRS vs. CRA. CRA is quite a flexible operation and are not a vindictive government department here in Canada, unlike the general impression that one often receives of the IRS. They are not going to go after you tooth and nail, but all the same, they will be slapping some pretty hefty interest charges on your unpaid balances, however, they are not usurous all the same.

So in sum, file your taxes....you don't have to send a cheque in at the same time. Next step would be to save. No need to sell stuff, or deliver pizzas. If you need the money, you will find it. It is always there in front of you.

[Danny]

Do you have a copy of this you could share?

"I set up a spreadsheet that functions like a "live" tax return that updates my tax liability each year in real time. I use the tax tables provided by the IRS, then plug in my expected net earnings, deductions, etc. Then if my situation changes, I update the spreadsheet and it re-figures my tax on the spot so I know whether to adjust withholding. That might be more work than most people want to do, but really it's just an initial investment of time up front and minimal maintenance on an ongoing basis.

As to your immediate $900 problem, can you tap an emergency fund, and take a few months to pay it back?

Posted by: Dan | March 13, 2009 at 10:49 AM "

Do you have a copy of this you could share?

[anonny]

The US IRS offers a payment plan. They will work it out with you over the phone and establish a minimum payment.

[Apex]

@Matt,

These are pretty funny comments. You suggest the CRA works with you and the IRS is going to go after you tooth and nail.

Then you say the CRA is going to slap you with hefty interest charges but they are not usurous.

So what is it that you think the IRS does to "go after you tooth and nail" that differs from the way in which the CRA "works with you" ?

The IRS will also give you interest charges just like the CRA. You can file an extension just like the CRA. The interest rates will not be fun but they will be less than a credit card.

So what is the vindictive part of the IRS methodology that differs from the CRA method?

If you are committing tax fraud or tax evasion, then you should fear the IRS and as a taxpayer I hope they do go after tax cheats. But if you are late or make mistakes or don't pay enough on time, you will be financially penalized for doing so, just like in Canada, and other than that, nothing else will happen.

It seems the rumors of the American taxpayers demise at the hands of the IRS may have been greatly exaggerated north of the border.

[Strick]

1 - Installment Plan. Do not avoid, even if you can't pay a dime.

2 - SPEND LESS THAN YOU NET (There are only two ways to make sure you do this, withhold more than you think you need to or save. Tax liability changes all the time, even if you don't. Don't know if its different above the border, but in the US even if you knew all the tax laws, all your income and all your deductions at the start of the year, you still can't know what your liability will be because they'll change the rules mid-year, every year.)

[elaine]

you can also go to the website that tells about overlooked deductions 1.you can deduct money if you looked for a job.2.you can deduct travel if it is related to your job.3.school loan interest.4.you can also purchase an traditional ira to off set the taxes for last year.

[indi500fan]

I'd suggest you apply for a job in the federal govt.
That way you'll have at least until the vetting process is complete until you even need to think about paying.

BTW congrats on your interest free loan from Uncle Sam.
I make it a point to borrow right up to the penalty level every year. I've always been surprised this isn't more common. When I hear someone bragging about a refund, I just think "how stupid".....

[kitty]

Pay, borrow from someone else if you can, but paying to IRS is a top priority. I'd second indi500fan - you got a tax free loan from the government, so if you can pay it without borrowing, you'll have money on the deal.

". When I hear someone bragging about a refund, I just think "how stupid"....
I suspect some people will get a refund this year because they planned for capital gains and got capital losses instead. I will get a large refund because I was planning to sell some of my stock in 2008 with gains and set up my withholdings with 10K of capital gains in mind. Since I had large capital gains the previous year, I wouldn't have qualified for safe haven this year to avoid penalty for 2008 had I underpaid. Instead on December 31st I sold some of the losers. I guess it's stupid. On the other hand, I could have invested this extra money in the market and lost. At least 0% is higher than stock market returns for the year.

[thomas]

I hope you got $1k worth of crap to sell. Not too many other choices available if you don't have credit (or don't want to take it).

[Christine]

I'm pretty sure you can put it on a credit card. I'd rather deal with the cc than the irs. If you don't file for an extension and set up a payment plan, they can garnish your wages up to 50%, seize your home or your car. Not sure what the interest is or the penalty you will have to pay. There is an 800 # on the irs.gov, worth a phone call.

Sell the motorcycle, expensive bike, jet ski, rv, pop up camper, snow blower, baseball cards, comics, collectibles, etc. Have a yard sale or list on craigslist. If you own your car outright, in some states you can get a loan against the title....really high interest rates though.

Lawns are starting to green up...take the mower door to door in the neighborhood and charge $20-30 each (1/2 the going rate), shovel snow, clean gutters, paint houses if you have the ladder, brushes and scraper. The govt was hiring to do the census...might be an evening job...walking...really good exercise. Don't deposit any of the money into your account...just buy a money order for it...no one is any the wiser. People still have to eat, get a second job stocking the grocery store shelves 2nd shift...only place hiring here anyway...legit too.

Take an exemption off your W4. Better luck next year!

[Jenn]

CRA will accept a payment arrangement. When you get your statement call the number on it and ask. AS long as your arrangement is made so that it can be paid off within a 12 month timeframe there isn't usually an issue. Longer payoff options can be negotiated but aren't favoured.
Your other option if you are in a real financial bind is to apply for the taxpayer relief provision under the reason of hardship. If you go to CRA's website www.cra.gc.ca and do a search for "Taxpayer Relief" there is a link to the form that should be used.

[Matt]

Apex, you totally missed the point of my last post. Please re-read.