tax payments are not deductible
I am making monthly payments to the Internal
Revenue Service on income taxes owed for 2002. Is any amount of
these payments deductible on my 2003 income tax return? -- Adam
You're in for a double whammy.
Although you're paying the IRS tax, interest and penalty
for not having paid on time, you can't deduct any of it. Interest
paid to the IRS on late taxes is only deductible by a corporation
that owes back taxes. Individuals are not allowed to claim interest
paid to the IRS even if the taxes relate to business income reported
on their personal tax return.
A lot of taxpayers deem this difference in treatment
to be unfair and have litigated over the years in an attempt to
claim interest paid to the IRS at least as a business deduction.
Although some of the earlier cases favored the taxpayers, lately
the consensus is that the interest is not deductible.
Since the payments to the IRS are not deductible,
this means that you have to earn enough to pay tax on the amount
that you earned so that you can turn the remainder over to the IRS
for the back taxes. For example, assume you're a self-employed sole
proprietor in the 25 percent tax bracket and also pay self-employment
tax of 15.3 percent. Your combined tax rate is 40.3 percent. Assume
also that you owe the IRS $10,000 for back taxes. If you earn $16,750,
your current tax is $6,750. That leaves you $10,000 to pay the IRS
on the old debt.
As you can see, the $10,000 debt has transformed
itself into an unmanageable 67.5 percent more. This what we in the
tax profession call a double whammy.