24 Jul Over 62 and Have Tax Debt? The IRS Has Some Special Rules for You
If the IRS and Uncle Sam are hounding you for tax payments, you may wonder: Can my assets be frozen? The answer is: The outcome depends on your specific situation.
Seniors are often on fixed benefits that barely pay for their household necessities, let alone cover emergencies and high-interest debt. Moreover, getting part-time employment to shave a few thousand dollars off your debt may not be possible for various reasons (health, mobility, etc.) in the golden years.
That’s why it’s crucial for both working and retired seniors to understand how tax debt can impact their financial wellbeing. Below are a few things to keep in mind.
Your liquid income can be garnished
Although it rarely happens, the Internal Revenue Service can garnish 15 percent of your social security income for outstanding income tax. However, the agency almost never touches the other retirement incomes of seniors. Note that you will be notified first if the IRS has plans to garnish your social security wages.
The IRS may issue a federal tax lien
Tax liens are claims the government makes on seniors’ real estate, including properties and other similar assets, when they’re past due on their tax payments. If you own a property and it’s your primary residence, here’s how a federal tax lien changes your situation:
- You can continue staying there.
- You might need to accommodate in-person visits from an IRS officer.
- The IRS will foreclose your property only if your home has enough equity to settle superior liens, such as property mortgage, as well as meet outstanding debts.
In other words, if you have ample equity in the property you’re attempting to refinance or sell, you’ll be asked to use some of it to pay your debts for meeting the closure.
Your Required Minimum Distributions (RMDs) may change
When it comes to Required Minimum Distributions, the government allows your retirement assets to grow tax deferred, but in case of outstanding debt, they’ll want to make sure they collect tax on the money before you die. Therefore, they can ask you to liquidate a certain percentage of your retirement savings annually. The RMD for the annual year is based on your accumulative age as well as the balances present in your tax-deferred bank accounts.
It’s worth mentioning that if a senior has multiple IRAs under the Required Minimum Distribution rules, they’re allowed to establish the overall amount they need to withdraw and take it from a single IRA. However, the situation may change based on how much you owe in taxes to the IRS.
Below is a visual explanation of how RMDs can affect your tax brackets.
If you die, the liquid and physical assets in your IRA go to the state
In the unfortunate case of your death, assets like home and money in an IRA will go the estate. Because of your tax debt, the estate is required to pay tax from the sale of the property; the inheritors get money from this source. Also, the IRS can define specific beneficiaries who’ll be entitled to your assets after your death.
Steps to avoid garnishment, tax levy, etc.
Fortunately, there are steps you can take to improve your financial wellbeing. The key is to act as soon as you realize you’re in trouble with the IRS. That means applying for a payment plan through the agency’s website. There are several types of programs that you can sign up for to resolve your debt. Fees usually range from $0 to $250 depending on your current income and the setup of the program.
Another option is to file what’s officially referred to as the “offer in compromise.” This is when you tell the Internal Revenue Service that you’re ready to pay a specific figure to settle some of your debt. Obtaining approval will depend on whether the tax agency sees this as the maximum amount you can use for settlement. With that said, seniors will need to meet certain requirements after approval. For example, those going through bankruptcy won’t be eligible to file for offers in compromise. Also, you can’t apply if you haven’t filed all of your returns.
Lastly, if you have got the means to zero out your asset-based accounts, you can use that option to escape garnishment. This could mean selling some of your assets, including real estate, vehicles, and jewelry. It could also mean liquidating the life insurance you bought a decade ago. However, if you can settle any of the debt without putting your assets on the line, make every effort to do so.
If that isn’t an option, consider protecting your retirement and pension benefits by contacting the Internal Revenue Service and creating a payment or installment agreement. If successful, the payment will be based on what you’re bringing in or earning every month. Seniors will need to pay on their debt until it is satisfied in full—even if it takes quite a few years.
All things aside, the best way to escape garnishment and tax penalties is to consult with a professional agency. Our tax professionals have been working with the Internal Revenue Service for years on behalf of our clients. In most instances, we’re able to negotiate regarding debts and taxes and make acceptable arrangements for relief–regardless of our clients’ situations.
Get in touch with our tax resolution specialists today, and learn why our clients have total confidence in our resolution abilities and powerful tax settlement solutions.