Ask Liz Weston

Get smart with your money

Taxes

Q&A: IRS Electronic Payment System

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Dear Liz: I was intrigued by your answer to the question about paying taxes through the IRS Electronic Tax Payment System. I went to the website you mentioned (www.irs.gov/payments) and found that there was a fee.

You didn’t point this out, and I think it is relevant. My quarterly estimated payment would be $1,726 and the fee for a Visa payment would be 2.29%, which equals $39.55. If my math is correct, that is quite a significant amount. Did I reach the correct interpretation of fees being charged?

Answer: If you return to www.irs.gov/payments, you’ll see two big blue buttons. The one on the left, IRS Direct Pay, takes you to the IRS’ free payment system for individuals. Directly below that button is a link for the Electronic Federal Tax Payment System, which offers a free method for businesses to pay their taxes.

Only if you choose the button on the right that says “Pay by Card” will you be taken to various payment processors that charge a fee. Those fees can be significant, which is why it’s worthwhile to take the time to explore the free options.

Q&A: IRS direct pay

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Dear Liz: Regarding the reader whose tax payment never made it to the IRS: I agree that electronic payments are the best and safest, but you might want to emphasize that the payments should be done directly through the IRS website.

I made the mistake of scheduling a couple of payments through my online banking, and a month later I received a notification from the IRS that I was in arrears, although the bank statement indicated that the payment has been debited.

It took several months of correspondence before the IRS acknowledged that the money was received. Luckily, the penalties and interest were only about $20, so I didn’t have to go through the additional hassle and filling out forms to reclaim it. The IRS website is very easy to use, and I haven’t experienced any problems since.

Answer: The IRS’ Electronic Tax Payment System, which was designed primarily for businesses, has been around for nearly two decades, but the agency only recently added a “Direct Pay” option expressly for individuals to make estimated tax payments and pay bills.

These methods and others, including electronic funds withdrawal when you e-file your return, are explained at http://www.irs.gov/payments.

Q&A: Electronic Federal Tax Payment System

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Dear Liz: I’m often required to make estimated quarterly payments and was always concerned I would miss one of them.

A few years ago, I came across the Electronic Federal Tax Payment System (EFTPS) that is offered by the U.S. Treasury. The beauty of the system is that once it is set up, there is nothing more for me to do. I set up all the payments I need to make and the system takes care of it.

I just have to set it up each year at the time I file my tax return. I have been using the system for several years and have had no issues whatsoever with it.

Answer: Thanks for sharing your experience with EFTPS. While that system allows you to schedule payments up to 365 days in advance, the Direct Pay option for individuals allows scheduling only up to 30 days in advance.

Q&A: Lost tax payment

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Dear Liz: I just received a letter from the IRS informing me that I missed a quarterly tax payment last September with several resulting penalties. I made that payment with a check from a securities trust account that I don’t closely monitor, so I didn’t realize the check hadn’t been cashed. The check was placed in a pre-addressed envelope with the IRS payment notice, stamped and deposited at the post office and has never been seen since. Do I have any recourse, and should all payments to the IRS be sent by certified mail with receipt required?

Answer: Electronic payments are typically the best and safest method for getting money to the IRS. Electronic payments generate a digital trail that shows the money leaving your account and landing at the IRS.

If you insist on paying with checks, use certified mail, return receipt requested. This paper trail isn’t a sure way of proving your case — after all, you could have mailed an empty envelope — but at least you’d have something to show the IRS.

Still, you shouldn’t give up hope of getting the penalties waived, said tax pro Eva Rosenberg, an enrolled agent who publishes the Tax Mama site. You can request a penalty abatement based on “reasonable cause,” Rosenberg said. According to the IRS site, “Reasonable cause relief is generally granted when the taxpayer exercised ordinary business care and prudence in determining his or her tax obligations but nevertheless failed to comply with those obligations.”

The IRS may say that you didn’t exercise “ordinary business care and prudence” since you didn’t use certified mail. But you can make the counter-argument that you’ve consistently made previous estimated tax payments this way without incident and this is the first time you’ve encountered a problem.

Rosenberg said the key to prevailing is to keep trying. The IRS may reject your first and second attempts to get a penalty waived but acquiesce on the third, she said.

“Don’t give up after the first two rejections,” Rosenberg said.

One more thing: Given the high rates of identity theft and database breaches, closely monitor all your financial accounts. That means checking them at least monthly, if not weekly. If you have more accounts than you can adequately monitor, consider consolidating accounts.

Q&A: Thrift Savings Plan

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Dear Liz: I turned 50 last year but did not make the catch-up contributions I was eligible to make to my government Thrift Savings Plan. This mistake cost me approximately $5,000 in additional taxes in 2014.

To make matters worse, my wife also did not make catch-up contributions in 2014 or for the previous four years for which she was eligible to do so. Can we retroactively make catch-up contributions for the last three tax years and file amended tax returns so we can get additional tax refunds?

Answer: It’s highly unlikely you cost yourself $5,000 in additional taxes, since the catch-up contribution for people 50 and older in 2014 was only $5,500. Your federal tax rate would have been limited to your tax bracket, which is likely somewhere between 15% and 28%. You could have cost yourself $5,000 if you didn’t make any contribution to the plan, since last year’s limit was $17,500 or a total of $23,000 with the catch-up.

The short answer to your question about whether you can catch up with catch-ups is no.

Contributions to workplace retirement plans typically have to be made before the end of the plan year. IRAs, meanwhile, allow contributions until the due date for filing your returns, so that contributions for 2014 could be made until April 15, 2015, and contributions for 2015 could be made until April 15, 2016.

Presumably you’re now signed up to contribute the maximum to each plan.

If you have extra cash to invest, both you and your wife could open IRAs even though you’re covered by workplace plans. If your modified adjusted gross income (MAGI) as a married couple is $96,000 or less, you can deduct the full contributions of $6,500 ($5,500 plus a $1,000 catch-up) each. You can get a partial deduction if your MAGI is between $96,000 and $116,000.

If you can’t deduct your contribution, consider putting the money in Roth IRAs if you can. Roths don’t allow upfront deductions — but the money is tax free when withdrawn in retirement. You and your wife could contribute $6,500 each to a Roth if your MAGI is under $181,000.

Q&A: American Opportunity Credit for college expenses

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Dear Liz: I am confused regarding my ability to take advantage of the American Opportunity Credit for college expenses in filing my 2014 tax return.

My accountant told me I didn’t qualify because my adjusted gross income exceeds $80,000. Yet when I researched on the IRS website, I seem to qualify. I paid qualified education expenses for my son to get an MBA and am claiming him as a dependent on my return, since he is unemployed and I support him. My adjusted gross income was $84,905.

The IRS rules discuss modified adjusted gross income less than $90,000. Is my accountant thinking of another tax credit that I don’t qualify for? Can I take advantage of any credit for providing educational expenses for my son to obtain a graduate degree? I filed for an extension in order to resolve this issue.

Answer: Education tax breaks can be baffling because each has different income limits, eligibility requirements and qualifying expenses.

Three of them — the American Opportunity Credit, the Lifetime Learning Credit and the tuition and fees deduction — are mutually exclusive. That means you can take only one per year, and you can’t use any of them for expenses paid with a tax-free 529 plan withdrawal.

It’s no wonder that many people who may be eligible to take these breaks don’t take advantage of them, even though they could shave thousands of dollars off their tax bills.

The American Opportunity Credit is usually the most valuable credit. It reduces taxes by up to $2,500 per student and is 40% refundable, which means people can get up to $1,000 back even if they don’t have any taxes to offset.

But the credit can’t be claimed for more than four years, and any year in which the old Hope Credit was claimed counts toward that limit. Since your son was in graduate school, it’s possible you already used up your ability to claim the credit.

You can qualify for the full tax break if your modified adjusted gross income is below $80,000 as a single filer or $160,000 for a married couple filing jointly. The credit gets smaller as your income goes up. After $90,000 for singles — and $180,000 for a married couple filing jointly — the tax break is no longer available.

If you can’t take the credit, your son might be able to claim it — if he had taxable income last year and you opt not to take a dependency exemption for him. Discuss this possibility with your tax pro.

You make too much money for the other two options: the Lifetime Learning Credit and the tuition and fees deduction. The Lifetime Learning Credit offsets 20% of tuition and certain other required expenses up to $2,000 per tax return.

In 2014, the credit was gradually reduced for modified adjusted gross incomes between $54,000 and $64,000 for singles, and $108,000 and $128,000 for married couples filing jointly.

The tuition and fees deduction reduces taxable income by a maximum of $4,000 for incomes up to $65,000 for single filers and $130,000 for joint filers, and by up to $2,000 for incomes over $65,000 for singles and $130,000 for joint filers. There’s no deduction for incomes over $80,000 for singles and $160,000 for joint filers.