37:["$","$L38",null,{"category":"$39","relatedArticles":[{"id":"cG9zdDoyNDEzNjk=","databaseId":241369,"postId":241369,"author":{"node":{"id":"dXNlcjoz","databaseId":3,"userId":3,"avatar":{"url":"https://secure.gravatar.com/avatar/47938df052bf0a5283bd6b77ab786737?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"SmartAsset employs a team of writers and editors with years of experience in the editorial, news and personal finance industries. Some staff members also hold the Certified Educator in Personal Finance (CEPF®) designation from the Institute for Financial Literacy.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Michael","fullName":"SmartAsset Team","lastName":"Carvin","name":"SmartAsset Team","postCount":{"pageInfo":{"offsetPagination":{"total":1507,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mcarvin","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTUwNw==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19507,"categoryId":19507,"link":"https://smartasset.com/tax-filing/articles","name":"Tax Filing","postCount":{"pageInfo":{"offsetPagination":{"total":106,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"tax-filing","ancestors":{"nodes":[{"name":"Taxes","slug":"taxes","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Taxes","id":"dGVybToxMzY=","slug":"taxes","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$3a","date":"2024-03-22T09:19:17","excerpt":"

When an individual or business owes taxes to the Internal Revenue Service (IRS), settling the entire amount in a single payment may not be financially feasible. In such cases, a tax payment plan can offer a viable solution. This arrangement with the IRS allows taxpayers to pay their due taxes over an agreed period, easing […]

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","

A financial advisor with tax expertise can help you optimize your tax strategy and potentially save you money. Connect with a fiduciary advisor today.

","

How Payment Plans for Taxes Work

","

If you’re reviewing your finances and realize that you have a more substantial tax bill than anticipated, a tax payment plan could be a structured solution. This is designed to help individuals and businesses in such predicaments.

","

Tax payment plans can help alleviate some financial pressure by allowing a taxpayer to distribute their debt in manageable increments over time. They also prohibit the IRS levying your assets and garnishing your wages. Levies are legal seizures of property to satisfy a tax debt, while garnishments allow the IRS to take a portion of a taxpayer’s income.

","

For example, imagine that you operate a small business and suddenly realize that you owe $7,500 in taxes. Paying this amount in full could significantly impact your business cash flow. By setting up a tax payment plan, you can spread out your payments and maintain your business operations without a financial disruption.

","

When setting up a payment plan, taxpayers can opt for either a short- or long-term plan based on how soon they think they can repay their debt. A short-term plan requires the outstanding balance to be paid within 180 days. However, there are no setup fees associated with these plans.

","

A long-term plan on the other hand is an installment agreement that requires monthly payments to be made. Unlike a short-term plan, the IRS charges setup fees for establishing a long-term plan, which can vary based on how you apply and how you plan to make your payments.

","

Taxpayers with long-term payment plans can:

","

Set up automatic monthly payments from their checking account (Direct Debit)
Make direct manual payments from their checking or savings account (Direct Pay)
Use the Electronic Federal Tax Payment System (EFTPS)
Make monthly payments by check, money order or debit/credit card

","

Lastly, it’s important to note that whether you opt for a short- or long-term payment plan, your balance can accrue penalties and interest until it’s paid.

","

Setting Up a Tax Payment Plan

","

","

Before setting up a tax payment plan, you’ll want to assess your tax liability and determine the full amount that’s owed, including taxes, penalties and interest.

","

From there you can apply for either a short- or long-term plan and pay the requisite setup fees. You’ll want to review your payment plan and stick to the defined schedule, if you have one. Finally, the IRS allows you to adjust and revise your payment plan if needed.

","

Here’s a closer look at the process of setting up a tax payment plan:

","

1. Apply for a Payment Plan

","

The IRS offers several ways to request a payment plan. You can apply for one online, by phone or mail, or request one in person.

","

Online: Use the IRS’s Online Payment Agreement Tool
Phone: Call 800-829-1040 (individual) or 800-829-4933 (business), or the phone number on your bill or notice
Mail: Submit Form 9465, Installment Agreement Request to the IRS

","

However, there are certain restrictions for who can apply for a payment plan online. To apply for a short-term payment plan online, you must owe less than $100,000 in combined taxes, penalties and interest. Meanwhile, you must owe $50,000 or less in combined taxes penalties and interest to qualify for a long-term payment plan online. All of your tax returns must also be filed.

","

2. Pay Setup Fee

","

Your setup fee can vary based on the type of plan you enroll in, how you apply for it and how you’ll ultimately make your payments. While short-term payment plans do not have a setup fee, long-term plan applicants should carefully consider their options, which are illustrated in the following table:

","

Long-term Payment Plan Setup Fees

","

Payment Option	Setup Fee
Automatic monthly payments (Direct Debit)	Online application: $31 Phone, mail or in-person application: $107 Low-income application: Fee waived
Direct Pay, EFTPS, monthly payment by check, money order or card	Online application: $130 Phone, mail or in-person application: $225 Low-income application: $43 (may be reimbursed

","

3. Review Your Payment Plan

","

Reviewing payment plan terms is critical. Taxpayers should periodically review their plan, not only when they first agree to it. This ongoing review is crucial to adapting to any changes in financial circumstances and avoiding the accumulation of additional interest and penalties.

","

A step-by-step checklist for this process may include:

","

Confirming payment amount: Know the exact amount of each installment.
Checking due dates: Note all due dates, perhaps marking them on a calendar or setting reminders.
Understanding interest and penalties: Acknowledge the impact of interest and penalties on the total amount paid over time.

","

4. Make Your Payments

","

How you make your payments may depend on how much money you owe the IRS. Individuals who apply for a payment plan online must make their payments via Direct Debit (automatic payments from a checking account) if their balance is over $25,000. Businesses that apply for a payment plan online must do the same if their balance is more than $10,000.

","

5. Revise Your Payment Plan If Needed

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If your financial circumstances change, contact the IRS to discuss potential adjustments to the payment plan. You can also revise your plan online using the ID.me system.

","

Bottom Line

","

","

Tax payment plans serve as a lifeline for those daunted by an unexpected tax bill. These plans can help taxpayers distribute their debt across a manageable timeline while mitigating the risk of severe financial disruption. You can apply for a payment plan online, by phone or mail or apply in person. However, you may owe a setup fee, as well as penalties and interest.

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Tax Season Tips

","$4c","

Photo credit: ©iStock.com/vitapix, ©iStock.com/Pekic, ©iStock.com/urbazon

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The expanded accounting equation builds upon the basic accounting equation’s use of assets, liabilities and equity by incorporating additional components such as revenues, expenses and withdrawals. This equation, often expressed as Assets = Liabilities + Owner’s Capital + Retained Earnings, offers a more detailed view of a company’s finances and helps track how these elements […]

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","

A financial advisor can help you evaluate investment opportunities and manage your portfolio. Connect with your advisor matches today.

","

Accounting Equation vs. Expanded Accounting Equation

","

The accounting equation, expressed as Assets = Liabilities + Equity, serves as the foundation of double-entry accounting by ensuring that every transaction is balanced. Also known as the fundamental accounting equation or the balance sheet equation, it focuses solely on the relationship between its resources (assets) and the claims on those resources, whether by creditors (liabilities) or owners (equity).

","

The expanded accounting equation takes this framework a step further by breaking down equity into its key components: common stock, retained earnings, revenues, expenses and owner withdrawals.

","

The typical format of the expanded accounting equation is:

","

Assets = Liabilities + Owner’s Capital + (Revenues – Expenses – Withdrawals)

","

The yield of this equation reveals how operational activities and shareholder decisions directly influence the equity section. For instance, revenues increase retained earnings, while expenses and dividends decrease it. This provides a more granular view of financial performance and changes in equity.

","

While the basic accounting equation serves to summarize a company’s overall financial structure, the expanded version provides deeper insights into what drives equity changes. It allows businesses to track profitability, manage costs and evaluate the impact of shareholder distributions more effectively. The expanded equation is particularly valuable for internal decision-making and detailed financial analysis, as it highlights the dynamic interplay between operational and financing activities.

","

Components of the Expanded Accounting Equation

","

","

Each component of the expanded accounting equation – assets, liabilities, owner’s capital, revenues, expenses and withdrawals or dividends – plays a distinct role in reflecting the financial health and operations of a company. To understand this, it helps to take a look at the individual components.

","

Assets

","

Assets are the resources a business owns that have monetary value. These include cash, inventory, equipment and accounts receivable. These items represent the economic benefits a company expects to realize in the future. Assets are typically categorized as either current, if they can be converted to cash within a year, or non-current, for longer-term resources.

","

Liabilities

","

Liabilities are financial obligations a business owes to outside parties. Examples include loans, accounts payable or other debts. They reflect claims against a company’s assets and are divided into current (due within a year) and long-term liabilities. Understanding liabilities is key to assessing a company’s financial stability and ability to meet its obligations.

","

Owner’s Capital

","

Owner’s capital represents initial startup money plus any ongoing investments in the company made by owners or shareholders. It’s the equity contribution used to fund operations, acquire assets or expand the business. In the equation, increases in this component increase equity and ownership in the company.

","

Revenues

","

Revenues consist of income generated from a company’s primary operations, such as sales of goods or services. They directly contribute to the increase in owner’s equity, as they signify the business’s ability to generate income. Revenue recognition follows specific accounting principles to ensure accuracy and consistency.

","

Expenses

","

Expenses are costs incurred to generate revenue, including items like salaries, rent, utilities and marketing. They reduce equity because they represent outflows of economic resources necessary to sustain operations. Expenses are typically categorized by function, such as administrative and selling, or nature, such as fixed and variable.

","

Withdrawals or Dividends

","

Withdrawals occur when business owners take funds out of the business for personal use in sole proprietorships and partnerships. For corporations, dividends represent payments to shareholders. Both withdrawals and dividends reduce equity, reflecting the distribution of earnings to stakeholders rather than reinvestment in the business.

","

Example of the Expanded Accounting Equation in Practice

","

For a simplified illustration of the expanded accounting equation, imagine a sole proprietorship with the following financial data:

","

Assets: $150,000
Liabilities: $50,000
Owner’s Capital: $80,000
Revenues: $60,000
Expenses: $30,000
Withdrawals: $10,000

","

To calculate the expanded equation:

","

Add the equity components and subtract liabilities:
$50,000 (Liabilities) + $80,000 (Owner’s Capital) + $60,000 (Revenues) – $30,000 (Expenses) – $10,000 (Withdrawals) = $150,000
Verify that this equals the total assets:
Assets ($150,000) = Liabilities ($50,000) + Owner’s Equity ($100,000)

","

This balance confirms the accuracy of the accounting equation.

","

Bottom Line

","

","

The expanded accounting equation offers a comprehensive framework for understanding how financial activities impact a company’s overall financial standing. By breaking down equity into its individual components, it provides a clearer picture of the ways revenue, expenses and distributions interact with assets and liabilities. This approach highlights the interconnected nature of financial transactions and supports more detailed analysis of a business’s financial health and performance over time.

","

Tips for Analyzing Investments

","$5f","

Photo credit: ©iStock.com/ridvan_celik, ©iStock.com/M Isolation photo, ©iStock.com/Ivan Pantic

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Phantom taxation occurs when individuals or businesses are required to pay taxes on income they haven’t actually received. Phantom income can arise with investments such as partnerships, real estate or mutual funds when taxable income is reported but not distributed to the taxpayer. Though the income is phantom, the tax liability is real and must be paid in cash. This can significantly impact financial planning and cash flow management. Fortunately, there are a number of strategies that avoid the phantom tax or mitigate its effects.

","

A financial advisor can help you minimize your tax liability, optimize deductions and plan for future tax obligations.

","

How the Phantom Tax Works

","

The phantom tax is a tax owed on income that has not been received in cash. This situation typically arises in investments such as partnerships or mutual funds when income is reinvested rather than distributed.

","

When this happens, investors may owe taxes on paper gains despite not having received any actual cash flow. With this possibility in mind, investors should be aware that even if a cash distribution isn’t received, they may still be liable for taxes on their share of the income. Covering taxes owed on phantom income may require setting aside funds to cover these liabilities.

","

One strategy for coping with phantom tax is to diversify your investment portfolio to include assets that provide liquidity. This can help ensure that you can readily raise the necessary funds to cover any tax liabilities that arise from phantom income. Additionally, working with a financial advisor can provide valuable insights into tax-efficient investment strategies.

","

Why the Phantom Tax Is Important

","

The phantom tax can significantly influence investment decisions, particularly for those holding assets that generate non-cash income. Investors need to consider the tax implications of their portfolio choices, especially when dealing with investments that accrue income without immediate cash payouts. A number of investments exhibit that characteristic.

","

For example, zero-coupon bonds do not pay interest until maturity, which may be years in the future. However, investors are required to pay taxes on the accrued interest annually. Because of this, making informed decisions about investing in these bonds requires factoring in the phantom tax. Some investors may opt for investments that align better with their cash flow needs and tax strategies.

","

How to Avoid the Phantom Tax

","

One way to avoid phantom tax is to invest in tax-efficient funds. These seek to minimize taxable distributions. Another strategy is to hold investments likely to incur phantom taxes in tax-advantaged accounts. such as IRAs or 401(k)s, where taxes are deferred.

","

Navigating the complexities of the phantom tax can be challenging without professional guidance. Engaging with a knowledgeable advisor ensures that you are well-prepared to handle any tax surprises, allowing you to focus on achieving your financial goals with confidence.

","

Assets That Might Incur a Phantom Tax

","

Many investors won’t ever owe any phantom tax. However, a sizable number of investments can expose an investor to this tax. Here are some common assets that might incur a phantom tax:

","$77","

Bottom Line

","

","

The phantom tax occurs when individuals or entities are taxed on income that they have not yet received in cash, often arising from investments in partnerships, real estate, or certain types of trusts. The phantom tax can be challenging because it impacts cash flow, requiring taxpayers to pay taxes on paper profits without possessing the income that created the tax liability. Understanding the nuances of the phantom tax not only helps in managing current financial obligations but also aids in making decisions about how to achieve long-term financial goals.

","

Tips for Tax Planning

","$78","

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Currently, the top U.S. capital gains tax rate applied to assets held more a year is 20%. This is well below the world’s highest capital gains tax rate of 42% levied by Norway, but somewhat above the average of European countries. China’s maximum long-term capital gains tax on individuals is the same as the U.S rate, while India’s ranges from 10% to 20%. Many countries levy no tax on capital gains, while others tax them at the same rate as ordinary income. When investing abroad, you may be subject to the tax laws of not only the U.S. but also the country you are investing in.

","

Talk to a financial advisor to get answers to your questions about capital gains taxes and international investment strategies.

","

Capital Gains Tax Concepts

","

If you sell an asset such as a share of stock, real estate property or other asset for more than you paid, you may owe a capital gains tax on the difference. Capital gains tax rates are generally lower than tax rates for ordinary income, which helps encourage investment. A 2023 study by British researchers suggested higher capital gains taxes reduce innovation. Looking at how state capital gains tax increases and decreases affected venture capital, the researchers found venture-funded companies filed fewer patents after capital gains were increased.

","

Capital gains taxes are part of the tax system in countries around the world. In the United States, the capital gains tax began in 1922 and has been in place since. However, while the tax has been present for over 100 years, according to an accounting of its history by consulting firm Wolters Kluwer, the maximum rate has varied widely.

","

The initial U.S. capital gains tax rate in 1922 was 12.5% for both corporations and individuals. This was gradually raised over the decades until in 1979 it reached 35% for individuals and 30% for corporations.

","

Since the 1970s, the maximum rate has changed many times but generally trended down for individuals while the corporate rate increased to 35%. In 2017, the corporate rate was cut to 21% while the individual rate held at 20%. Over the century of capital gains taxes changes in the United States, the average has been approximately 26% for both individuals and corporations.

","

Capital Gains Tax Rates

","

The current U.S. top long-term capital gains tax rate is 20%. This applies to single filers earning $518,900 and joint filers earning at least $583,750 in 2024.

","

Compared to similar countries, the U.S. currently has a mid-level capital gains tax rate. Denmark has the world’s highest rate at 42%. Other European countries also have significantly high rates, including Norway at 37.8% and France at 34%. A number of European Union nations, including Belgium, Czech Republic, Switzerland and Turkey, have no capital gains tax. Overall, European countries average 17.9%, according to a 2024 Tax Foundation analysis.

","

Elsewhere, many large economies have similar rates to the U.S., according to a worldwide survey by consulting firm PwC. For instance, China taxes individual capital gains at a maximum of 20%. India’s top individual rates range from 10% to 20%. Among leading South American economies, Brazil levies a top rate of 22.5% on individuals and Argentina collects 15%.

","

A financial advisor can help you devise an effective tax strategy for your goals. Use this free tool to get matched.

","

Economic Effects of Capital Gains Tax Hikes

","

Many countries also impose capital gains taxes on income earned within their borders, even if the investor is not a resident. If the country where the investment is located taxes capital gains, U.S. investors may owe capital gains taxes there as well.

","

To help reduce the burden of double taxation, the U.S. offers a Foreign Tax Credit. This allows U.S. taxpayers to offset their U.S. tax liability by the amount of taxes paid to a foreign government, up to a certain limit. For capital gains, however, the rules can be complex, and not all foreign taxes are eligible for a full credit.

","

The U.S. has tax treaties with several countries to prevent or reduce double taxation, which might affect capital gains. These treaties may allow for reduced tax rates or exemptions in certain situations, but capital gains are not always covered by these treaties.

","

Because international tax issues can be complex, it’s often beneficial for U.S. investors to consult a professional financial advisor to ensure compliance with both U.S. and foreign tax obligations and to make the most of any credits or deductions.

","

Bottom Line

","

Capital gains tax rates around the world vary from zero to a high of 42% in Denmark. Several other European countries also have high capital gains tax rates, but the European average is less than the current U.S. top capital gains tax rate of 20%. Proposals to raise capital gains tax rates by presidential candidate Kamala Harris would put the top rate closer to its historical norm in the U.S. but above the rates charged by many other large and economically advanced countries. Higher capital gains taxes may inhibit saving, reduce overall economic activity and also discourage innovation.

","

Tips

","$8b","

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