Author Topic: Income Tax/SL Problem  (Read 4173 times)

uppy

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Income Tax/SL Problem
« on: January 23, 2014, 03:47:10 PM »
Hi all, I have a question about a situation involving federal income tax and student loans.

In a nutshell, I know I will owe something like $1k on my income taxes this year. That's based on doing a couple of tax worksheets and estimating. I have saved up this money, in preparation for this probability.

However, an unexpected problem: my GF, who just finished her first semester of grad school, was hit with $2k of unexpected tuition charges. We had carefully worked it out and covered her entire tuition for the year based on the school's claim that the year would cost X amount. Suddenly they tell us, "Actually, no, each semester will cost $2k more than we originally said." So we are in a pickle.

Our options:

1. We can use the money I've saved up for my taxes, plus our $1k EF, to pay the bill, then figure out next semester when it comes around. This will leave me paying a penalty for late payment of taxes, plus interest on however many months it takes me to pay off the balance on my taxes --probably 8 - 10 months based on how much I am currently saving each month. The rules on this are confusing. It looks like a 0.5% penalty on the amount, plus 0.4% each month the amount remains unpaid...but I am not sure. Anyone an expert on late tax payments??

2. We can take out what's called the "Graduate Plus" loan for $2k at 7.8% interest. This is what we will probably have to do next semester, unless we can save up $2k somehow. We are living on my single, pretty measly income currently. 

Obviously, using my tax savings and our EF will clear us out pretty well. But if we pay it off we can start saving again right away, and possibly pay less interest (although I'm not sure), that is, until next semester.

Any and all help is greatly appreciated, esp. if anyone knows how much I'll end up paying in penalties/interest if I pay my taxes late. (I would file on time, so I wouldn't have late filing penalties, just payment.) That versus the 7.8% interest on the loan would probably make the decision for us.

If we do have to take out the loan, we could TRY to pay it off before she graduates, resulting in 0 interest accruing (I think). Assuming it would be a total of $4k (for both semesters), it would cost us $200/month to pay that off before she graduates in 20 months. $200 is about the total amount we have been able to save each month -- so that will be our entire savings.

Yikes!

marblejane

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Re: Income Tax/SL Problem
« Reply #1 on: January 23, 2014, 04:09:03 PM »
Interest will accrue on the Grad Plus loan while your girlfriend is in school. It gets capitalized and added to the principal while payment is deferred.

Has your girlfriend applied for financial aid? She might qualify for a Perkins loan, or work study, if she is not working.

uppy

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Re: Income Tax/SL Problem
« Reply #2 on: January 23, 2014, 04:14:47 PM »
Interest will accrue on the Grad Plus loan while your girlfriend is in school. It gets capitalized and added to the principal while payment is deferred.

Has your girlfriend applied for financial aid? She might qualify for a Perkins loan, or work study, if she is not working.

Sorry, should have mentioned that in the post above. She has applied for financial aid and has taken out the max. amount of loans she is allowed besides the Grad Plus loan. She can't do work study since her program has a work component.

That is bad news about the interest. Bummer.

Shor

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Re: Income Tax/SL Problem
« Reply #3 on: January 23, 2014, 04:44:09 PM »
The whole point behind an emergency fund is to pay for emergency payments. The call is whether this situation qualifies as worth putting down the money for it. I would say yes, unless there is a chance you might hit an even harder payment: rent.. minimum debt payment

Is there any way you can walk in to the bank and get a quote on a private loan to handle the amount? Just to get a comparable loan amount against the Graduate Plus Loan, though the rate may be just as rough with fewer bonuses.

Finally, if you are desperate, you could try swallow your pride and each out to friends/family. Don't go in expecting anything, and be ready to go in to super-saver mode (i.e. rice & water, zero misc. expenses) until you dig yourself out.

This is a really tough situation and will be very difficult to get through this, and you will be feeling the effects for some time as you try to recover.

Is there any place where you can recover your income? Drop everything you can stand to lose. Even something like dropping the 401k contributions or pulling out of investments. Doesn't matter if you don't have it, but have to ask just in case there is some untapped asset available you can draw from temporarily.. Just from reading the description, things sound right on the edge of drawing blanks, which means hair on fire mode, but maybe it is not as bad as I read..

I got a message from a friend where the IRS informed him that back in 2010 he had under-reported his income by like $1000, and the interest charged came out to be 9.2%. They did not list any additional fee, just tacked on interest for 2 years running... Might be different if you forgo the check entirely..

Here is a random webpage which goes through some options on deferred payment or paying in installations. Maybe your answer can be found there.. http://law.freeadvice.com/tax_law/income_tax_law/paying-taxes-late.htm

uppy

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Re: Income Tax/SL Problem
« Reply #4 on: January 23, 2014, 05:41:39 PM »
Shorlan: Thanks for the ideas. I hadn't thought of trying for a private loan, but I too am skeptical that the interest rate would be better than the 7.8%. Reaching out to friends and fam. is out of the question since we have already done that to get this far. It looks like we will be literally putting everything we have into getting her this degree -- which I am ok with since this is what she wants to do with her life. Honestly I am only PO at the school for not telling us about these expenses. Oh well, onward and upward.

9.2%!! Ouch. But it would only be $1k at 9.2% versus $2k at 7.8%. According to my math it would still be better to make the government wait.

MissPeach

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Re: Income Tax/SL Problem
« Reply #5 on: January 24, 2014, 12:12:51 PM »
I have no experience on the college loan side. I would recommend avoiding anything regarding paying taxes late. I used to do taxes for businesses but the IRS (and state agencies) generally charge penalties plus interest at a high rate. If the bill is unpaid, they can also report it to your credit report even if you request a modification or payment plan.

MustachianAccountant

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Re: Income Tax/SL Problem
« Reply #6 on: January 24, 2014, 12:32:32 PM »
I'm assuming you've already found this, but in case you haven't, here's the IRS page on setting up an installment agreement:
http://www.irs.gov/Individuals/Payment-Plans,-Installment-Agreements

There's a fee associated with setting up an installment agreement on top of the interest.
I don't know what the current interest rate is with the IRS, but here's the policy:
Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.
From here:
http://www.irs.gov/uac/Newsroom/Interest-Rates-Remain-the-Same-for-the-Fourth-Quarter-of-2013

Looks like it was only 3% last quarter which is a better deal than your 7.8%. Look at that! The government is more reasonable than private industry!

marblejane

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Re: Income Tax/SL Problem
« Reply #7 on: January 24, 2014, 01:46:46 PM »
Shorlan: Thanks for the ideas. I hadn't thought of trying for a private loan, but I too am skeptical that the interest rate would be better than the 7.8%. Reaching out to friends and fam. is out of the question since we have already done that to get this far. It looks like we will be literally putting everything we have into getting her this degree -- which I am ok with since this is what she wants to do with her life. Honestly I am only PO at the school for not telling us about these expenses. Oh well, onward and upward.

9.2%!! Ouch. But it would only be $1k at 9.2% versus $2k at 7.8%. According to my math it would still be better to make the government wait.

If you are willing to cosign for her, I would bet that the private loan rates would be lower. You might as well check into this, at least- try this site for comparisons of private loan rates: http://www.simpletuition.com/

uppy

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Re: Income Tax/SL Problem
« Reply #8 on: January 24, 2014, 02:44:03 PM »
Thanks all -- I have continued this conversation here: http://www.mrmoneymustache.com/forum/welcome-to-the-forum/late-payment-of-taxes-interest/

MustachianAccountant: according to others the effective penalty + interest rate would be more like 9% assuming it took 12 months to pay it off. No such luck!

Also it seems there is a flat fee for doing a repayment plan with the IRS at all. What MissPeach said about the credit report is also not very alluring.

marblejane: good idea about cosigning. I will have to look into that.