Click on the links below to jump to each section in this article:
- Paying off Debt the Smart Way
- Small Business Financing: Securing a Loan
- July 15 Deadline for Reporting Foreign Income
- Here’s How to Pay If You Owe Money to the IRS
- Q & A: Returning an Economic Impact Payment
Paying off Debt the Smart Way
With a potential economic downturn in the wings due to COVID-19, being debt-free is a worthwhile goal. Unfortunately, between mortgages, car loans, credit cards, and student loans, this is unrealistic for most people – especially those of pre-retirement age. Instead, it’s better to start by focusing on managing debt. When you handle debt wisely, you won’t have to shell out every cent of your hard-earned money to your lender or feel like you’re always on the verge of bankruptcy.
These tips will help you get started paying off debt the smart way and help you save extra money to pay down those debts even faster:
Assess the Situation
First, assess how much and what type of debt you have by writing it down using pencil and paper or entering the data into a spreadsheet like Microsoft Excel. You can also use a bookkeeping program such as Quicken or a debt management app such as Debt Manager, Debt Payoff Planner or if you are only concerned about student loan debt, Changed. When compiling or entering your list be sure to Include every instance you can think of where a company has given you something in advance of payment such as your mortgage, car payment(s), credit cards (all of them), tax liens, student loans, PayPal Credit, and store payments or cards used on electronics or other household items such as Home Depot or Best Buy.
Record the day the debt began and when it will end (check your credit card statements), the interest rate you’re paying, and what your payments typically are. Next, as painful as that might be, add it all up – try not to be discouraged. Remember, the goal is to break this down into manageable chunks while finding extra money to help pay it down.
If you’re one of the millions of people who have lost their jobs during the coronavirus pandemic, many auto and student loan lenders, as well as mortgage and credit card issuers are offering temporary concessions. Before you make any payments call or visit their websites to see what their policies are during the pandemic and whether there are options for deferral and other measures you can take.
Identify High-Cost Debt
Even if you haven’t lost your job or experienced sickness related to COVID-19, it never hurts to identify which debt is more expensive than others and pay it off first. Unless you’re getting a payday loan – which you shouldn’t be – the worst offender is consumer debt such as personal loans, auto loans, and credit cards with high-interest rates. Credit cards are easiest to tackle so start with them first. Here’s how to deal with them:
- Don’t use them. You don’t have to cut them up, but take them out of your wallet, put them in a drawer, and only access the one with the lowest interest rate in an emergency.
- Identify the card with the highest interest and pay off as much as you can every month and pay the minimum amount due on other cards. When that one is paid off, work on the card with the next highest rate.
- Check your credit cards for balance transfer rates and transfer balances from higher interest accounts to a lower interest one. When you pay less interest, you can pay down your debt faster. The catch is that at the end of the balance transfer period (typically 6 to 12 months), the low or if you’re lucky, zero interest rate, reverts to a higher credit card interest rate.
- Don’t close existing cards or open any new ones. It won’t help your credit rating, and in fact, will only hurt it.
- Pay on time, absolutely every time. Late payments – even one – can lower your FICO score.
- Go over your credit card statements in detail and look for monthly charges for things you no longer use or don’t need anymore.
- Call your credit card companies and ask them nicely if they would lower your interest rates – sometimes it works!
Save, Save, Save
Do whatever you can to retire debt – even if it means reevaluating your priorities and changing your lifestyle. Consider taking a second job and using that income only for higher payments on your financial obligations. Substitute free family activities for high-cost ones. Sell high-value items that you can live without.
Do Away with Unnecessary Items to Reduce Debt Load
Think twice before purchasing the latest high-tech gadgets. Do you need the latest iPhone? You’ll be surprised at what you don’t miss. Consider buying a used car, forgoing that expensive gym membership you don’t have time to use anymore, visiting the public library to check out DVDs or subscribing to a video streaming company instead of going to the movies – at least until your debt is under control.
Never, Ever Miss a Payment
Not only are you retiring debt, but you’re also building a stellar credit rating. If you ever get another job, buy a house, rent an apartment, or buy another car, you’ll want to have the best credit rating possible. A blemish-free payment record will help with that. Besides, credit card companies can be quick to raise interest rates because of one late payment and a completely missed one is even more serious.
Pay with Cash
To avoid increasing debt load, make it a habit to pay for everything you purchase with cash or a debit/credit card. If you don’t have the cash (or the money in your bank account) for it, you probably don’t need it. You’ll feel better about what you do have if you know it’s owned free and clear.
Shop Wisely, and Use the Savings to Pay Down Your Debt
If your family is large enough to warrant it, invest $45 to $60 and join a store like Sam’s or Costco – and use it. Shop there first, then at the grocery store. Change brands if you have to and swallow your pride. If you’re concerned about buying organic, rest assured that even at places like Costco you will have many options. Use coupons and store savings clubs religiously. Calculate the money you’re saving and use it to pay down debt. Remember, every penny counts, and even if it’s a small amount every month, consistently saving adds up over time.
While each of these steps, taken alone, probably doesn’t seem like much, if you adopt as many as you can, you’ll see your debt decrease every month. If you need help managing debt or need advice regarding steps you can take to recession-proof your finances, help is just a phone call away.
Small Business Financing: Securing a Loan
At some point, most small business owners will visit a bank or other lending institution to borrow money. Understanding what your bank wants, and how to properly approach them, can mean the difference between getting a loan for expansion or scrambling to find cash from other sources.
Unfortunately, many business owners fall victim to several common, but potentially destructive myths regarding financing, such as:
- Lenders are eager to provide money to small businesses.
- Banks are willing sources of financing for start-up businesses.
- When it comes to seeking money, the company speaks for itself.
- A bank, is a bank, is a bank, and all banks are the same.
- Banks, especially large ones, do not need and do not want the business of a small firm.
Understand the Basic Principles of Banking
It’s vital to present yourself as a trustworthy businessperson, dependable enough to repay borrowed money and demonstrate that you understand the basic principles of banking. Your chances of receiving a loan will greatly improve if you can see your proposal through a banker’s eyes and appreciate the position that they are coming from.
Banks have a responsibility to government regulators, depositors, and the community in which they reside. While a bank’s cautious perspective may be irritating to a small business owner, it is necessary to keep the depositors’ money safe, the banking regulators happy, and the economic health of the community growing.
Each Banking Institution is Different
Banks differ in the types of financing they make available, interest rates charged, willingness to accept risk, staff expertise, services offered, and in their attitude toward small business loans.
Selection of a bank is essentially limited to your choices from the local community. Typically, banks outside of your area of business are not as anxious to make loans to your firm because of the higher costs of checking credit and of collecting the loan in the event of default.
Furthermore, a bank will typically not make business loans to any size business unless a checking account or money market account is maintained at that institution. Ultimately your task is to find a business-oriented bank that will provide the financial assistance, expertise, and services your business requires now and is likely to require in the future.
If you need assistance deciding which bank best suits your needs and provides the greatest value for your business operation, don’t hesitate to call the office.
Building a favorable climate for a loan request should begin long before the funds are needed. The worst possible time to approach a new bank is when your business is in the throes of a financial crisis. Devote time and effort to building a background of information and goodwill with the bank you choose and get to know the loan officer you will be dealing with early on.
Bankers are essentially conservative lenders with an overriding concern for minimizing risk. Logic dictates that this is best accomplished by limiting loans to businesses they know and trust. One way to build rapport and establish trust is to take out small loans, repay them on schedule, and meet all requirements of the loan agreement in both letter and spirit. By doing so, you gain the banker’s trust and loyalty, and he or she will consider your business a valued customer and make it easier for you to obtain future financing.
Provide the Information Your Banker Needs to Lend You Money
Lending is the essence of the banking business and making mutually beneficial loans is as important to the success of the bank as it is to the small business. This means that understanding what information a loan officer seeks–and providing the evidence required to ease normal banking concerns–is the most effective approach to getting what is needed.
A sound loan proposal should contain information that expands on the following points:
- What is the specific purpose of the loan?
- Exactly how much money is required?
- What is the exact source of repayment for the loan?
- What evidence is available to substantiate the assumptions that the expected source of repayment is reliable?
- What alternative source of repayment is available if management’s plans fail?
- What business or personal assets, or both, are available to collateralize the loan?
- What evidence is available to substantiate the competence and ability of the management team?
Even a brief examination of these points suggests the need for you to do your homework before making a loan request because an experienced loan officer will ask probing questions about each of them. Failure to anticipate these questions or providing unacceptable answers is damaging evidence that you may not completely understand the business and/or are incapable of planning for your firm’s needs.
What to Do Before You Apply for a Loan
1. Write a Business Plan
Your loan request should be based on and accompanied by a complete business plan. This document is the single most important planning activity that you can perform. A business plan is more than a device for getting financing; it is the vehicle that makes you examine, evaluate, and plan for all aspects of your business. A business plan’s existence proves to your banker that you are doing all the right activities. Once you’ve put the plan together, write a two-page executive summary. You’ll need it if you are asked to send “a quick write-up.”
2. Have an accountant prepare historical financial statements.
You can’t talk about the future without accounting for your past. Internally generated statements are OK, but your bank wants the comfort of knowing an independent expert has verified the information. Also, you must understand your statement and be able to explain how your operation works and how your finances stand up to industry norms and standards.
3. Line up references.
Your banker may want to talk to your suppliers, customers, potential partners, or your team of professionals, among others. When a loan officer asks for permission to contact references, promptly answer with names and numbers; don’t leave him or her waiting for a week.
Walking into a bank and talking to a loan officer will always be something of a stressful situation. Preparation for and thorough understanding of this evaluation process is essential to minimize the stressful variables and optimize your potential to qualify for the funding you seek.
The advice and experience of a tax and accounting professional are invaluable. Don’t be shy about calling the office with any questions or to request a consultation.
July 15 Deadline for Reporting Foreign Income
If you live or work outside the United States, you generally must file and pay your tax in the same way as people living in the U.S. This includes people with dual citizenship. Due to the coronavirus pandemic, people who live and work abroad have until Wednesday, July 15, 2020, to file their 2019 federal income tax return and pay any tax due. The deadline is normally June 15.
This extension was included in a wide range of Coronavirus-related relief announced in early April. The extension generally applies to all taxpayers who have an income tax filing or payment deadline falling on or after April 1, 2020, and before July 15, 2020. Anyone, including Americans who live and work abroad, nonresident aliens and foreign entities with a U.S. filing and payment requirement, have until July 15 to file their 2019 federal income tax return and pay any tax due.
Also, U.S. taxpayers with foreign accounts exceeding certain thresholds may be required to file Form FinCen114, known as the “FBAR” as well as Form 8938, also referred to as “FATCA.”
FBAR is not a tax form. Normally, it is due to the Treasury Department by April 15; however, due to the coronavirus pandemic, there is an automatic extension to October 15, 2020. Form FinCen114 must be filed electronically through the BSA E-Filing System website. The BSA E-Filing System supports electronic filing of Bank Secrecy Act (BSA) forms (either individually or in batches) through a FinCEN secure network.
FATCA (Form 8938) is submitted on the tax due date (including extensions, if any) of your income tax return, which in 2020, is due on July 15th (October 15th with an extension).
Here’s what else you need to know about reporting foreign income:
1. Report Worldwide Income. By law, Americans living abroad, as well as many non-U.S. citizens, must file a U.S. income tax return and report any worldwide income. Some key tax benefits, such as the foreign earned income exclusion, are only available to those who file U.S. returns. Any income received, or deductible expenses paid in foreign currency must be reported on a U.S. tax return in U.S. dollars. Likewise, any tax payments must be made in U.S. dollars. Both FinCen Form 114 and IRS Form 8938, require the use of a December 31 exchange rate for all transactions, regardless of the actual exchange rate on the date of the transaction. Generally, the IRS accepts any posted exchange rate that is used consistently.
2. Report Foreign Accounts and Assets. Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts.
3. File Required Tax Forms. In most cases, affected taxpayers need to file Schedule B, Interest and Ordinary Dividends, with their tax returns. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.
Some taxpayers may need to file additional forms with the Treasury Department such as Form 8938, Statement of Specified Foreign Financial Assets or FinCEN Form 114 (formerly TD F 90-22.1), Report of Foreign Bank and Financial Accounts (“FBAR”).
FBAR. Taxpayers do not file the FBAR with individual, business, trust or estate tax returns. Instead, taxpayers with foreign accounts whose aggregate value exceeded $10,000 at any time during 2019 (or in 2020 for next year’s filing returns) must file a Treasury Department FinCEN Form 114 (formerly TD F 90-22.1), Report of Foreign Bank and Financial Accounts (“FBAR”).
The deadline for filing the FBAR is the same as for a federal income tax return and must be filed electronically with the Financial Crimes Enforcement Network (FinCEN) by April 15, 2020; however, as mentioned above, due to COVID-19, there is an automatic extension to October 15, 2020. FinCEN grants filers who missed the April 15 deadline are also granted an automatic extension until October 15, 2020, to file the FBAR.
Taxpayers who want to paper-file their FBAR must call the Financial Crimes Enforcement Network’s Regulatory Helpline to request an exemption from e-filing.
Form 8938. Generally, U.S. citizens, resident aliens, and certain nonresident aliens must report specified foreign financial assets on Form 8938, Statement of Specified Foreign Financial Assets if the aggregate value of those assets exceeds certain thresholds:
- If the total value is at or below $50,000 at the end of the tax year, there is no reporting requirement for the year, unless the total value was more than $75,000 at any time during the tax year
- Taxpayers who do not have to file an income tax return for the tax year do not have to file Form 8938, regardless of the value of their specified foreign financial assets.
The threshold is higher for individuals who live outside the United States and thresholds are different for married and single taxpayers. In addition, penalties apply for failure to file accurately.
Please contact the office if you need additional information about thresholds for reporting, what constitutes a specified foreign financial asset, how to determine the total value of relevant assets, what assets are exempt, and what information to provide.
An individual may have to file both forms, and separate penalties may apply for failure to file each form.
4. Review the Foreign Earned Income Exclusion. Many Americans who live and work abroad qualify for the foreign earned income exclusion when they file their tax return. This means taxpayers who qualify will not pay taxes on up to $105,900 of their wages and other foreign earned income they received in 2019 ($107,600 in 2020). Please contact the office if you have any questions about foreign earned income exclusion.
5. Don’t Overlook Credits and Deductions. Taxpayers may be able to take either a credit or a deduction for income taxes paid to a foreign country. This benefit reduces the taxes these taxpayers pay in situations where both the U.S. and another country tax the same income. However, you cannot claim the additional child tax credit if you file Form 2555, Foreign Earned Income or Form 2555-EZ, Foreign Earned Income Exclusion.
6. Requesting an Extension. Individual taxpayers who need additional time to file beyond the July 15 deadline can request a filing extension to October 15 by filling out Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. Businesses that need additional time to file income tax returns must file Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns.
7. Combat Zone Extension. Members of the military qualify for an additional extension of at least 180 days to file and pay taxes in certain situations. Deadlines are also extended for individuals serving in a combat zone or a contingency operation in support of the Armed Forces. This applies to Red Cross personnel, accredited correspondents, and civilian personnel acting under the direction of the Armed Forces in support of those forces. Spouses of individuals who served in a combat zone or contingency operation are generally entitled to the same deadline extensions with some exceptions.
Help is just a phone call away.
If you’re a taxpayer or resident alien living abroad that needs help with tax filing issues, IRS notices, and tax bills, or have questions about foreign earned income and offshore financial assets in a bank or brokerage account, don’t hesitate to call.
Here’s How to Pay If You Owe Money to the IRS
The federal tax deadline is quickly approaching. If you owe money to the IRS – including estimated and other business taxes – here are six options for quick and easy electronic payments:
Taxpayers who owe a 2019 income tax liability, as well as estimated tax for 2020, must make two separate payments on or by July 15, 2020 – one for their 2019 income tax liability and one for their 2020 estimated tax payments. The two estimated tax payments (originally due April 15 and June 15), however, can be combined into a single payment.
- Electronic Funds Withdrawal (EFW). This option allows taxpayers to file and pay electronically from their bank account when using tax preparation software or a tax professional. EFW is free and only available when electronically filing a tax return.
- Direct Pay. Direct Pay is free and allows taxpayers to securely pay their federal taxes directly from their checking or savings account without any fees or preregistration. Taxpayers can schedule payments up to 30 days in advance. After submitting a payment through Direct Pay, taxpayers will receive immediate confirmation. They can opt-in to receive email notifications about their payments each time they use Direct Pay.
- Credit, Debit Card or digital wallet. Pay online, by phone, or with a mobile device through any of the authorized payment processors. The processor charges a fee. The IRS doesn’t receive any fees for these payments. Go to IRS.gov/payments for authorized card processors and phone numbers.
- IRS2Go. The IRS2Go mobile app is free and offers taxpayers the option to make a payment with Direct Pay for free, or by debit, credit card, or digital wallet through an approved payment processor for a fee. Download IRS2Go free from Google Play, the Apple App Store or the Amazon App Store.
- Electronic Federal Tax Payment System. This free service gives taxpayers a safe and convenient way to pay individual and business taxes by phone or online. To enroll and for more information, call 800-555-4477 or visit eftps.gov. Both business and individual taxpayers can opt-in to receive email notifications about their payments.
- Cash. Taxpayers paying with cash can use the PayNearMe option. Payments are limited to $1,000 per day, and a $3.99 fee applies to each payment. Taxpayers choosing this option should start earlier rather than later because PayNearMe involves a four-step process. Initiating a payment well ahead of the tax deadline will help taxpayers avoid interest and penalty charges. The IRS offers this option in cooperation with OfficialPayments and participating retail stores. Details, including answers to frequently asked questions, are at IRS.gov/paywithcash.
As a reminder, taxpayers must file their 2019 tax returns by July 15, 2020, or request a three-month extension to October 15, 2020. Any taxes owed, however, are still due on July 15 and even if they can’t pay, taxpayers should still file an extension to avoid the higher penalties for not filing at all.
Q & A: Returning an Economic Impact Payment
According to the Treasury Department, more than 159 million individuals have already received their Economic Impact Payments; however, a recent audit found that the IRS sent $1.4 billion in stimulus checks to deceased individuals. As such, many people may have received a payment for a deceased family member or another taxpayer who is not eligible to receive a payment and may have questions about what to do. Here are some answers:
Q: How should an individual return an Economic Impact Payment?
Mail the payment to the correct IRS mailing address listed on the Economic Impact Payment Information Center page at IRS.gov. The mailing address is based on the state that the person lives in and may be different from where you send your tax forms and payments.
Q: What if a payment was received for someone who has died?
A payment made to someone who died before they received the payment should be returned to the IRS. Return the entire payment unless the check was made out to joint filers and one spouse is still living. In that case, return half the payment, but not more than $1,200.
If someone can’t deposit a check because it was issued to both spouses and one spouse has died, the individual should return the check. Once the IRS receives and processes the returned payment, an Economic Impact Payment will be reissued to the surviving spouse.
Q: What if the paper check was not cashed or deposited?
If the paper check was not cashed or deposited take the following steps:
- Write Void in the endorsement section on the back of the check.
- Mail the voided Treasury check immediately to the appropriate IRS location.
- Don’t staple, bend or paper clip the check.
- Include a brief explanation of why they return the check.
Q: How should a direct deposit payment or a paper check that was already cashed or deposited be returned?
In this case, mail a personal check, money order, etc., to the appropriate IRS location. Visit the Economic Impact Payment Information Center on IRS.gov or call the office if you aren’t sure where to send the payment.
Make the check or money order payable to the U.S. Treasury and write 2020 EIP, as well as the taxpayer identification number, Social Security number or individual taxpayer identification number of the person whose name is on the check. A brief explanation of why the Economic Impact Payment is being returned should also be included.
If you received your EIP as a debit card and want to return the money to the IRS and NOT have the payment re-issued, please visit the Economic Impact Payment Information Center on IRS.gov or call the office for assistance as there are specific instructions.