What Happens When You Don’t Do Your Taxes?

There are a number of negative consequences for not doing your taxes when you’re supposed to. Let’s go over what can happen and how to dig out.

Tax day can be stressful for many people but even more so for a person who hasn’t filed their taxes in a few years. The longer you go without filing your taxes, the more stressful your situation will become, so you may as well try to fix it. Especially when you start thinking about the penalty charges that may be accumulating.

What happens if you don’t do your taxes?

Not filing your tax return or paying your taxes on time or at all can lead to serious consequences, including:

  • Penalties for late filing: The IRS will issue a Failure to File Penalty of 5% of the unpaid taxes you owe for each month or partial month that your tax return is late, unless you are also issued a Failure to Pay Penalty in the same month. In that case, the Failure to File Penalty may be reduced by the amount of the Failure to Pay Penalty for that month. The penalty will not, however, exceed 25% of the taxes you owe. 
  • Penalties for late payment: The IRS will issue a Failure to Pay Penalty of 0.5% of the amount of tax owed after the due date and for each month or partial month the tax remains unpaid. The penalty will not, however exceed 25% of the taxes you owe.
  • Interest charges: Not paying your taxes on time can lead to penalties and interest charges on the amount owed. Interest may accrue on the unpaid tax owed up until the date of payment in full. The interest rate is based on the federal short-term rate plus 3% and is adjusted quarterly.
  • Legal consequences: Continuing to ignore your tax responsibilities can lead to wage garnishments, tax liens and levies, and even imprisonment.

The good news is that the IRS actually does try to help those who come forward on their own and, in many cases, is willing to work something out.

What happens if you are late paying your taxes?

You may be subject to penalties and interest charges if you are late paying taxes that you owe. The penalty amount will depend on how late you are and how much you owe. The IRS can take legal action against you in order to collect late tax payments. These actions may include wage garnishment or seizure of assets. 

There is a separate penalty for failure to file your tax return on time. If you think you will owe taxes and not have enough money to pay them, you might consider filing your return on time and working out a payment plan with the IRS. Working with a tax pro can give you peace of mind that your return will be done professionally and with your specific situation in mind. In many cases, returns can be done quickly as well, and filed electroncially to make sure they are filed on time.

What can be done to catch up when you haven’t done your taxes?

One way to catch up with your taxes is to file late tax returns. Here are the general steps:

  • Gather your tax documents and file your tax returns. For each of the years you have not filed your taxes, you are going to need your W-2’s and/or 1099’s. If you are unable to locate these documents, you can request them from the IRS using a Form 4506-T. You will need to file a return for each year you missed. Most companies that provide e-filing services have forms for the past two years. If you need to go back further than that, you will have to request the forms from the IRS and submit your returns by mail.
  • Pay taxes that you owe. Once you have submitted your tax returns to the IRS and your state, you will want to pay any taxes that you owe along with penalties that have accumulated. You can check out the list of penalties on the IRS website. If you cannot pay your entire balance, you will be charged interest until you can. If you are expecting a refund or ended up not owing any taxes, there is no penalty.
  • Work out a payment plan with the IRS. If you are unable to make a payment in full for what is owed, you could be eligible for a payment plan. If you are currently low-income, they may have additional options for you. You can apply for a payment plan on their website or by calling the IRS at (800) 829-1040.

Going through the steps of carefully gathering information and then preparing and filing the correct documents and working out the correct fees can be overwhelming and very time consuming. You don’t have to do this on your own. You can work with a tax pro who will help you file on time.

Do you need a tax professional and how do you find one?

In most cases, simply filing your tax returns and paying your taxes will get you out of tax trouble. However, it might be a good idea to meet with a tax attorney or tax filing professional to make sure you are handling things correctly and to learn about any other options that might be available to you. Rocket Lawyer now offers affordable and convenient help for tax prep, filing, and attorney advice. Get matched with a tax pro, scan and upload your documents, and rest easy knowing you have professional help on your side.  

While it may be stressful, it will serve you better in the long run to address your IRS issues now. File your tax returns and pay your back taxes to get in good standing with the IRS and your state tax agency.

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Authorize a Trusted Adult To Care for Your Child

What is a Child Care Authorization Form?

A Child Care Authorization is a form that allows someone to temporarily care for or make decisions about your child, such as allowing your nanny to pick up your child from daycare. Child Care Authorizations help document that you are entrusting your children to a childcare provider and gives them limited powers to make decisions in regards to your children.

Create a Child Care Authorization to define the terms when another person can make decisions about your child. 

If you want to grant legal authority to make major decisions, create a Power of Attorney for Child instead.

When to use a Child Care Authorization:

  • You would like to authorize your child’s school to release your child to another individual.
  • You would like to give authorization for another individual to make decisions regarding your child in your unexpected absence.

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Annuities: Income For Life

Having a company pension plan that provides guaranteed income for life could certainly relieve many financial worries, especially in retirement.

However, many Americans don’t have access to company pension plans, and those who do often have a plan that doesn’t provide a guaranteed income stream.

As part of an overall income generating strategy, annuities can be an ideal solution for taking your retirement savings and turning it into a dependable income stream for your retirement.

So let’s take a closer look at annuities, which can also provide you with income for life.

In exchange for a single lump sum deposit, a financial institution makes guaranteed regular income payments to you that contain both interest and a return of principle.

Annuity payments can continue for a chosen period of time or for the lifetime of one or two people.

While some income generating investments like mutual funds can be depleted over time, life annuities provide retirement income that’s guaranteed for life no matter how long you live.

The amount of income provided by an annuity is determined at the time of purchase and will depend on a number of factors such as;

  • the amount of money you deposit,
  • current interest rates,
  • whether or not you want your payment amount indexed to help keep up with inflation,
  • the sex and age of each spouse,
  • and the number of years you want to guarantee income payments in case of premature death.

If you die prematurely, there are options available to you to ensure that your annuity investment isn’t lost.

For example, various guarantee options can ensure a specific amount of income is paid from your annuity investment to you, or your named beneficiaries.

Some types of annuities have tax advantages as well.

Since annuity payments consist of principle and interest, only the interest portion is taxable.

Prescribed annuities evenly spread the taxable interest over the life of the annuity, thereby offering some tax deferral.

Regular annuities must report taxable income as it is earned, which is higher in the early years and lower when the principle is reduced.

If you are looking for ways to earn guaranteed income for as long as you live, then speak with an advisor about how life annuities can play a role in your overall financial plan.

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Power of Attorney: What You Need to Know

General and Special Powers of Attorney

A General Power of Attorney is a document under which you authorize another person to act on your behalf in a variety of situations. In contrast, a Special Power of Attorney is a document under which you authorize another person to act on your behalf in specific situations only.

A General Power of Attorney is very broad and provides extensive powers. A general statement is included which gives the Agent “full power and authority” to act on your behalf. The document then lists certain powers to make it clear that you intended to grant such broad powers. For a list, see General Powers, below.

A Special Power of Attorney document provides the Agent with only those powers that are listed in the document. For a list, see Special Powers, below.

General Powers

Broad powers granted in a General Power of Attorney can include authority to act with respect to the following subjects:

  • Real Property.
  • Tangible Personal Property.
  • Stocks and bonds.
  • Commodities and options.
  • Banks and other financial institutions.
  • Operation of entity or business.
  • Estates, trusts, and other beneficial interests.
  • Claims and litigation.
  • Personal and family maintenance.
  • Benefits from governmental programs or civil or military service.
  • Retirement plans.
  • Taxes.

In addition, optional powers include powers to:

  • Maintain and operate business interests.
  • Employ professional assistance.
  • Make gifts.
  • Make transfers to revocable (“living”) trusts.
  • “Disclaim interests” (this power can be an important estate planning tool that helps avoid estate taxes).

If providing broad powers is not desirable, a Special Power of Attorney, which can be limited in scope, may be more appropriate.

Special Powers

A Special Power of Attorney document provides the Agent with only those powers that are listed in the document, which may include the following special powers:

  • Create, amend, revoke, or terminate an inter vivos trust.
  • Make a gift.
  • Create or change rights of survivorship.
  • Create or change a beneficiary designation.
  • Authorize another person to exercise the authority granted under this power of attorney.
  • Waive the principal’s right to be a beneficiary of a joint and survivor annuity.
  • Access the content of electronic communications.
  • Exercise the fiduciary powers that the principal has authority to delegate.
  • Disclaim or refuse an interest in property, including a power of appointment.

If limiting the Agent’s power to this list is not desirable, a General Power of Attorney, which is broader in scope, may be more appropriate.

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5 Things to Consider When Receiving an Inheritance

Those who fall in the age range of 60-80 currently hold approximately half the wealth in the US. As a result, their children are expected to receive the largest inheritance across all generations. While there are expectations that this inheritance won’t go as far as it would have years ago due to high inflation recently, the amount passed down can still help many young adults out financially when used wisely.

To some, receiving an inheritance may come as a surprise. Others may be aware of the possibility of an inheritance or even expect it. This can lead to anxiety over the transfer of wealth and how to best manage their inheritance. According to a study conducted by New York Life, under half of adults who expect to receive any inheritance, whether in the form of cash or non-cash assets, feel comfortable with managing it.

If you anticipate receiving any type of inheritance in the future, knowing your options is critical. Here are some tips on how to approach receiving an inheritance.

Manage your expectations

If you are expecting an inheritance, keeping yourself in check with the amount you may receive is best. If your parents, or whomever you may inherit from, do not have a Will or beneficiaries on their accounts, their estate would go to probate, which can be lengthy and costly. Or there may be accounts where someone else is named a beneficiary but was never updated, such as an ex-spouse. Further, end-of-life costs may add up, leaving less to distribute.

If you’re comfortable, talking to your family members may help clear the air of any confusion. A great place to start would be to discuss your parents’ accounts, such as their will or retirement plans.

Talk to an expert

If you are unsure where to begin or want extra help, contacting a financial advisor can help. There may be some paperwork to do, or you may have questions about tax implications, and seeking the advice of an expert is the best way to ensure you’re doing all the correct steps. A financial advisor can also help you create short- and long-term goals of what to do with your finances and help you manage any non-cash assets.

Pay off some of your debts

Assessing your debts to see if it is possible or pay some off may be a hot item on your to-do list if you receive an inheritance. Depending on where you are in your life, some possible debts would be credit card debts, student loans, mortgages or car loans. Assess the different interest rates on your debts and make choices that work the best for you with your financial goals in mind.

Save and invest

Depending on the sum of your inheritance, it might make sense for you to put some of the money away. While putting it in a savings account might be a first instinct, you’ll want to assess which account is best and will provide you with the best rate.

If you don’t need your inheritance money for any short-term goals, looking at other ways to invest your money is a good idea that could help you earn more on your assets compared to that of a savings account. Putting your money into a certificate is a good way to safely put your money away and earn a set interest rate for a period of time. Or, investing your money in a stock market is an option if you have a longer timeframe and are comfortable dealing with stock market volatility.

Get your own estate in order

It is never too early to get your own estate in order, and after you receive an inheritance is a good time to either start the process or update your current documents. Start by checking to make sure you have a record of all your accounts and assets in a safe place. Then, see if you need to add or update the beneficiaries linked to the accounts. Lastly, start a will or update your current one.

While starting this process now may feel daunting, it will make all the difference to your family later on. If you have recently lost a loved one and are in the process of receiving an inheritance, know that you can take time to grieve before jumping into your finances. There’s no need to rush.

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4 Questions to Ask Your Parents About Retirement and Estate Planning

Sooner or later, it will be time for adult children to have a conversation with their parents about their retirement, will and other financial concerns. If you are at the point where your parents are getting older, it may be time to bring up their finances and how you can be more involved. While talking about money is tough, especially when you must bring it up to your parents and their future, it is important.

Here are some tips on how to get the conversation started and key questions to ask:

Ease into the conversation

Many families hold off on having such a conversation until something happens, such as a parent’s declining health or a death. At that point, it might be too late or the conversation too difficult. By having this conversation early, everyone has a better chance of being on the same page with a clear understanding of the parent’s wishes, which can mitigate stress later on.

Start the conversation by approaching what you want to talk about directly, but with kindness and respect. Let your parents know that you simply want to understand their wishes when it comes to their finances and would like to be more involved if something happens. Do not approach the conversation in a way that may come off condescending or that you know better, as this may cause your parents to be defensive.

Ask about retirement and their financial plan

If your parents have yet to retire, learning more about their retirement goals can help gain insight into their finances and wishes for their future. Asking questions about their plans after retirement, such as if they have a financial plan in place, how they want to spend their retirement or where to live is a great place to start. If they have yet to think about it, mention how speaking to a financial advisor might be helpful.

Learning about your parents’ retirement goals early also may affect your current financial plan for you and your family, especially if your parents might lean on you for financial help in the future.

Inquire whether they have a list of their accounts

If your parents have multiple accounts—like a savings account, IRA, investments, etc.—having information about them all in a safe location can simplify the process if an emergency occurs. With this in mind, it is a good idea to ask your parents if they would be okay with providing you with a list of their financial assets and the beneficiaries attached to the accounts. However, if they don’t want to share this with you now, ask if they could provide you with where they keep this type of information, the contact information of their financial advisor (if they have one) or if they could put their account information in a sealed envelope only to be opened in an emergency as a compromise.

Do they have a will and is it up to date?

Asking your parents about whether they have a will in place and who is the executor is another important piece of information to learn about when speaking to your parents about their finances. Knowing this information can better prepare you and the rest of the family if something happens. Wills also outline specific requests for the executor, such as celebrations or burial preferences, so knowing about these early can help you prepare for the specific requests if need be.

While not everyone has a will, they are a valuable document that will help ease the process once a family member passes. If your parents don’t have one now, ask them if they would be willing to meet with an estate attorney to begin the process.

Start planning early by having the hard conversations

Speaking about finances with anyone, no matter the relationship is difficult. But by starting the conversation early you may avoid confusion and headaches later. Bringing up finances, retirement goals and planning and wills earlier, can help keep you aware of your parents’ situation now and in the future.

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