Tax bill too big to pay all at once? Sign up for an IRS payment plan

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate


Do you owe the IRS money this year? You have several options for paying your tax online. But if you can’t pay it all at once, the IRS gives you payment plan choices.

Note, however, that your first step must be to file your tax return on time. Failure to do so can result in stiff penalties.

Paying with plastic

Some taxpayers find the easiest way to pay is with a credit card. The IRS has awarded contracts to three companies to accept payments by plastic: Official Payments, Link2Gov and WorldPay. They take American Express, Discover, MasterCard, Visa or a variety of debit cards.

Each company has its own fee schedule that will add to your bill.


If you do pay a fee, make a note of it for next year’s filing. The IRS has ruled that this amount is deductible as a miscellaneous itemized expense.

Keep in mind that if you don’t pay off your credit card in full, you’ll start racking up interest charges on your account. In some cases, though, your credit card interest charges might fall below IRS penalties and interest you’d owe if you don’t pay on time.

A low-interest credit card may be a good option in this scenario.

Installment plans

If your tax bill is too large for a credit card, the IRS will take monthly payments.

Approval is not automatic unless:

  • You owe less than $10,000.
  • You have paid taxes in a timely way during the past five years without entering into an installment agreement.
  • You can pay the full amount within three years.

To get the program going, you can attach Form 9465, Installment Agreement Request, to the front of your tax return. Or, you can request an installment agreement online at the IRS website if the total amount you owe is not more than $50,000.

Taxpayers who seek an installment plan must provide detailed financial information, including data on equity assets, that the IRS will verify.

Keep in mind that paying over time, even to Uncle Sam, will cost you more.

  • Expect to pay a one-time user fee of $225, up from $120 last year.
  • The fee drops to $107 for direct-debit agreements.
  • Some lower-income taxpayers could pay a reduced fee of $43.
  • Applying online is your best bet: You pay a $149 one-time fee, or only $31 if you agree to a direct-debit plan.

You’ll be billed for any fee when the agency sends you a notice detailing your payment terms. Plus, penalties and interest continue to accrue to your unpaid tax bill. The IRS may also file a federal tax lien against you, which will be released when you pay off your installment loan.

Another way to deal with a large tax bill is with a home equity loan. That way you won’t have to pay IRS penalties and fees.

Offer in compromise

What if you can’t pay off your tax bill, in whole or part, in three years or five years or even longer? Then it might be time to negotiate.

The IRS might be willing to accept a lump-sum payment offer of less than your total tax bill if it is realistic. In these cases, the agency hopes to get some taxpayer money sooner than it would after years of costly collection efforts.

The IRS will review your financial situation and future income potential to determine whether your offer is appropriate. Be warned, however: This program was designed only for extreme cases, and few filers will qualify for the program. If you believe your situation does indeed meet the requirements, you need to file two forms: Form 656, Offer in Compromise, and Form 433-A, Collection Information Statement.

To find out whether you qualify for an offer in compromise before filling out the paperwork, use the IRS’ online pre-qualifier tool. The questionnaire format will let you know if you’re eligible, as well as help determine an acceptable preliminary offer amount.

Options for offers in compromise include:

  • Lump sum cash offer — This must be paid in five or fewer installments within five months after the offer is accepted. You must include 20 percent of the offer amount plus a $186 application fee.
  • Periodic payment offer — This is paid in six or more monthly installments within 24 months after the offer is accepted. You must produce the first proposed installment payment plus $186.

The $186 fee is waived for qualifying low-income taxpayers.

The IRS has created a special website with “what if” scenarios regarding tax and payment issues for taxpayers who are having a hard time making their payments.

Regardless of which payment plan method you choose, make your decision now. Delay will only compound your financial and tax problems since penalties and interest charges will continue to accrue. By sending in any amount when you file your return, at least you’ll ultimately reduce your interest and penalty charges.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

Beware the costly, complicated AMT, or alternative minimum tax

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate


The alternative minimum tax, or AMT, is widely unpopular and has been a perennial punching bag whenever tax reform is discussed. President Donald Trump has vowed to kill the AMT, which cost him $31 million on his 2005 tax return.

This parallel tax calculation method has been around since 1969 to ensure that wealthy taxpayers didn’t use loopholes to escape paying their fair share of taxes. The original target was 155 filers with the then-exorbitant income of $200,000 who avoided paying any federal taxes.

For many decades the AMT wasn’t indexed for inflation, so more and more middle-income taxpayers were subject to the tax. A 2013 law fixed that, so the AMT is now adjusted each year to reflect inflation.

What exactly is the alternative minimum tax?

The alternative minimum tax, commonly referred to as the AMT, has its own set of rates (26 percent and 28 percent) and requires a separate computation that could substantially boost your tax bill.

Basically, it’s the difference between your regular tax bill, figured using ordinary income tax rates, and your AMT bill, figured by filling out more IRS paperwork. When there’s a difference, you must pay that amount, the AMT, in addition to your regular tax.

Common tax breaks disallowed

The AMT rejects or reduces many common tax breaks used every year by individual taxpayers to lower their IRS bills.

For example, under the AMT:

  • You cannot deduct state and local taxes.
  • If you are 65 or older, have lots of itemized medical deductions and fall into the AMT, you’ll lose some of those write-offs.
  • Miscellaneous itemized deductions, which must exceed 2 percent of your adjusted gross income under the regular tax system, are disallowed under the AMT.
  • Personal exemptions may be disqualified.
  • While mortgage interest on your main and second home is still AMT-deductible, home equity loan interest is restricted. It can’t be deducted unless the money is used solely to pay for home improvements.
  • Real estate property taxes also are disallowed as deductions under the AMT.
  • Some tax credits that reduce your regular tax liability do not reduce what you owe under the AMT. Once you add back these disallowed credits and run the numbers, you might be subject to a bigger IRS bill if your taxable income exceeds the annual AMT exemption amount for your filing status.

herman blog

Many of the tax breaks not allowed under the AMT system do affect predominantly wealthy individuals or businesses with complicated tax circumstances. These include:

  • Incentive stock options.
  • Intangible drilling costs.
  • Tax-exempt interest from certain private activity bonds.
  • Depletion and accelerated depreciation on certain leased personal or real property.

Considering making a real estate investment?

Do more to pay more

To help sort through the AMT mess, some taxpayers turn to computer software packages, most of which include AMT computation, or hire professional help.

For the past couple of years, the IRS has provided some free AMT calculation assistance. AMT Assistant is an online tool that helps taxpayers determine whether they owe the tax. You just answer a few questions about entries on your draft 1040 and the system does the rest. Based on your entries, the calculator will tell you that either you do not owe the AMT or that you must go further by filling out Form 6251 to find out how much you owe.

But the IRS plans to retire the tool after the close of this filing season. Fewer people need it since it’s easy to figure out whether you owe the tax by using tax preparation software, including through the IRS’ Free File, which automatically calculates any tax owed.

If you find you must pay the AMT, the extra money you owe is never welcome. But dealing with it now is better than the alternative: letting the IRS discover that you should have paid it. Then you’ll owe interest and penalties, too.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

Tax lesson for teachers: Educator expenses can be written off

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate

tax deductions for teachers

Teachers on average spend $530 of their own money during the school year to pay for supplies, snacks for students and other classroom items.

Teachers and other educators can get a tax deduction of up to $250 for some of those costs as well as continuing education expenses.

Even better, they don’t have to itemize to get the tax break. Educator expenses are one of the so-called above-the-line deductions claimed directly on a Form 1040 or via tax software.

Educator expenses deduction enhanced

Congress made the tax break for educators a permanent part of the tax code in 2015.

Lawmakers also indexed the $250 maximum deduction amount for inflation. It didn’t change for the 2016 tax year, because of low inflation, but it could increase in future years.

What items are deductible?

Besides teachers, counselors, principals and aides can take the deduction if, for the tax year, they were employed at a state-approved public or private school system from kindergarten through grade 12, and worked at least 900 hours during the school year.

Educators can write off unreimbursed costs for:

  • Books
  • Supplies
  • Computer and other equipment (including software and services)
  • Supplementary materials used in the classroom
  • Professional development programs

The IRS also applies its “ordinary and necessary” rule here. An item purchased for your classroom must be considered ordinary:  something that is common and accepted in the education profession.

It also must be necessary: defined as helpful and appropriate, though maybe not required.

So buying a recording of “Death of a Salesman” to help drive home Arthur Miller’s points to your students would likely meet tax muster. But purchasing a new HD television, instead of watching on your school’s working-but-old set, may raise some IRS eyebrows.

Couples who share education careers could get a double break if they file jointly. However, each spouse is limited to $250 of qualified expenses.

What about home schooling? Sorry, but the tax law specifically states that costs for this type of instruction don’t count toward the educator expenses deduction.

Circumstances could limit expenses

In addition to the eligibility requirements on expenses, the IRS has set some other restrictions on what’s deductible.

The tax agency says when an educator uses any tax-favored funds to pay for his or her own schooling, those amounts must be subtracted from the total the teacher claims under the educator expenses deduction.

Take for example Joe Jones, a high school English teacher who is working toward his master’s degree in literature during school breaks. He cashed in savings bonds to pay his tuition and excluded the bonds’ $150 interest from tax. He also spent $200 for books on Shakespeare to distribute to his 11th-grade students. He must subtract the $150 in tax-free interest from the $200 for the books, leaving him only $50 to claim under the educator expenses deduction.

The same rule applies to nontaxable earnings a teacher gets from qualified state tuition programs or tax-free withdrawals from a Coverdell education savings account.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.