It’s good to owe taxes when you file your return.
I know that sounds crazy, and it’s definitely not a popular opinion…but it’s the best situation for you financially…especially if you’re a single mom stretching your income to support your family.
After all, there’s a reason it’s called a tax return: The government has to pay you back the extra taxes you paid – literally return your excess taxes. That means they’ve been holding on to YOUR money, and they haven’t even been paying you any interest.
Think about it: If you’re getting $1,200 back, that means you’ve been paying them $100 extra every month all year. It’s a good deal for the federal government, but a bad deal for you. You’d never voluntarily pay an extra $100 to your landlord, electric company, or Internet service provider, and let them hold on to it all year, right? And what single mom couldn’t use that $100 monthly budget bump?!
So the best case: you’ll get a very small refund ($100 or less), or owe a small amount. That means you’ve estimated your tax liability well, and kept the use of your own money throughout the year. You could be using your money every month, all year, to pay down credit card debt, kick extra money into an investment or retirement account, build an emergency fund (that pays at least a little interest), save for a college tuition…you get the idea. But like most people, so many single moms just hand over extra money to the IRS, then wait to get it back in a lump sum when they file their tax returns. That’s a terrible waste of your money.
As long as you don’t owe too much, you won’t face any IRS underpayment penalties or interest charges. You’ll avoid those extras if
- You paid (through withholding and estimated taxes) at least as much as you did on your 2015 tax return (the one you filed in 2016)
- You didn’t owe any taxes for 2015
- You owe less than $1,000
- Your balance due is less than 10% of your total 2016 tax bill
The second part of this is not owing more than you can afford to pay at once, which can be easily avoided with careful planning during the year – we’ll talk about that in detail in an upcoming post. When you do it right, you’ll end up with more money in your pocket every month, and a very small tax refund or payment in April.
If you do end up with a balance due on your 2016 tax return, it’s very easy to pay your tax bill – even at the very last minute. In fact, there are 5 ways to pay, so pick the method that’s easiest for you. Be aware that some of these payment methods come with fees on top of your tax payment.
- Cash: Yep, you can actually pay up to $1,000 of your taxes in cash at a “participating retailer,” your local 7-Eleven (seriously!) in most states. To pay this way, you’ll use the PayNearMe program. Click on the “Make a Payment” tab to get started. Then you’ll enter some basic information (like the amount you want to pay) and you’ll get a confirmation email with a PayCode (which expires in 7 days). Take the email with the PayCode to a participating 7-Eleven, and pay your taxes on the spot. There’s a $3.99 fee to pay this way.
- Check or Money Order: This is the old-fashioned way to pay your taxes – by mail – and you can do this even if you e-file. The check or money order must be payable to “United States Treasury,” not to the IRS (to protect you from people who might steal the check – IRS is very easy to change to MRS. Something), and it must be for the exact amount due. On the memo line, write your Social Security number and “2016 Form 1040.” Write your name and address on the check (if it’s not preprinted) or money order. Print out Form 1040-V, fill it in, and mail that along with your payment. Make sure to have this postmarked by April 18, 2017 so it will count as being paid on time. The correct IRS mailing address depends on where you live:
IF you live in . . . THEN use this address to send in your payment . . . Florida, Louisiana, Mississippi, Texas Internal Revenue Service, P.O. Box 1214, Charlotte, NC 28201-1214 Alaska, Arizona, California, Colorado, Hawaii, Idaho, Nevada, New Mexico, Oregon, Utah, Washington, Wyoming Internal Revenue Service, P.O. Box 7704, San Francisco, CA 94120-7704 Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Montana, Nebraska, North Dakota, Ohio, Oklahoma, South Dakota, Wisconsin Internal Revenue Service, P.O. Box 802501, Cincinnati, OH 45280-2501 Alabama, Georgia, Kentucky, New Jersey, North Carolina, South Carolina, Tennessee, Virginia Internal Revenue Service, P.O. Box 931000, Louisville, KY 40293-1000 Connecticut, Delaware, District of Columbia, Maine, Maryland, Massachusetts, Missouri, New Hampshire, New York, Pennsylvania, Rhode Island, Vermont, West Virginia Internal Revenue Service, P.O. Box 37008, Hartford, CT 06176-7008
- Direct Pay: You can pay your tax bill directly from your bank account using IRS Direct Pay. This service is available practically all the time: from Midnight to 11:45 p.m. ET Monday through Saturday, and 7 a.m. to 11:45 p.m. ET on Sunday. The program walks you through your reason for making a payment, identity verification, bank account information, and payment amount and date. Keep clicking through until the end to finish. There’s no fee for using the Direct Pay system. (Note: This may not work with all browsers and operating systems – I’ve seen some Mac users get a little frustrated trying to use Direct Pay.)
- Debit or Credit Card: This method, also easy to use, comes with fees and one big potential drawback. If you won’t be able to pay off the credit card bill when it comes due, you’ll end up paying interest on your tax payment. That said, the IRS has partnered with some payment processors to make paying your tax bill simple and convenient. The minimum fee for debit card payments is $2.25 and for credit card payments is $2.50 (credit card fees are charged as a percentage of your payment). You can only make two credit card payments in one year for any single tax bill (so if you’re planning to split the payment among different cards, you can only use two).
- Electronic Funds Withdrawal: If you used the IRS Free File program, commercial tax software, or a professional tax preparer, you can pay with an electronic funds withdrawal – a direct debit from your bank account. The IRS does not charge any fees for this, but your bank might, so check with them to make sure you don’t face any unexpected extra costs.
Tomorrow we’ll talk about what to do if you can’t afford to pay your entire tax bill at once – a situation many single moms find themselves in, especially if it’s the first time paying taxes on their own. Do not worry! You have several options that will keep the IRS off your back, and let you pay your tax debt over time without sinking your budget. The most important thing here is to file your tax return on time even if you can’t pay. Not only will that keep you from being charged with a penalty, it also opens up the number of payment options available.
Make sure you file your tax return and make your payment before midnight tomorrow (April 18, 2017). And, remember, it’s better to owe a little than to get a big refund.