Are IRS Installment Tax Payments Deductible? An installment agreement is one way to pay back taxes, interest, and penalties to the IRS over time if you cannot pay in one lump sum. Like a credit card payment, you are paying back the debt (plus any interest and penalties accrued) over time, rather than paying the debt all at once. This is the most widely used payment plan offered by the IRS and one that they are likely to grant you.
Also, other instances to do with the IRS often seem like they are part of an installment plan. In this article, we parse some of the other common confusing claims you may or may not make associated with payments or fees.
How Likely Are You to Be Granted an Installment Agreement?
The IRS is relatively open to granting installment agreements to those who need them. For example, if you owe less than $50,000 and are current on your taxes, you should be given an installment agreement (generally for 72 months) from the IRS automatically with just a simple request.
If you owe more than $50,000, you will have to provide some detailed financial information but still have a good chance of it being granted. You should be aware that, like a credit card, you are paying back not only debt but interest and penalties that generally amount to approximately 8-10% as well, depending on the size of your debt that can add up fast.
Another thing to note is that you also get a say in determining your monthly payment, so give that some thought as you go through the process. If your installment agreement is approved, the IRS will want you to pay via payroll deduction or direct debit.
Are Taxes and Interest Deductible?
One general question asked by taxpayers who are currently paying an installment agreement or who are considering applying for one is whether any portion of the payment is tax-deductible.
NO – Unfortunately, the answer to this is no.
Unlike tax breaks that you might get on your mortgage interest and property taxes, you are not allowed to deduct the interest or penalties that are part of an IRS installment agreement. You should be aware of this as you think through whether this kind of payment plan will work for you. Federal taxes are never tax-deductible with one exception – you can deduct a portion of self-employment taxes paid. Unless you are entirely self-employed, payments made to meet your federal income tax bill each quarter cannot reduce your gross income when calculating your tax liability in the current or next filing year. However, any prepayments made to the IRS will reduce your overall tax bill. In summary, this sole exception means that self-employed taxpayers can write off the estimated taxes they paid throughout the year, but payrolled workers cannot.
What the 2018 Tax Law Mean for the Self Employed
The new tax laws in 2018 bring a small change if you pay self-employment taxes. If you earn up to $128,000, you will be subject to the 15.3% self-employment tax. As an example, if you make $100,000, you’ll owe $19,645. In taxes which we recommend paying in quarterly payments of $4,867 without deductions. There has also been an increase to the federal standard deduction, which now stands at $12,000.
Are IRS Penalties and Interest Deductible?
NO – The U.S. tax code does not allow taxpayers to deduct penalties or interest calculated on balance owed as assessed by the IRS. Fines or penalties a taxpayer owes to the government for violating local, state, and federal laws are never deductible. These are typically a combination of the sum for violating tax laws or tax credits. If you are being penalized for misreporting income or claiming false deductions or tax credits, then you are not given the favor of writing off those payments.
However, the IRS states in Publication 535 that a taxpayer is eligible to deduct any legal fees and court expenses incurred to resolve a tax problem for which the IRS assessed penalties. Court fees can also be deducted on a tax return subject to the 2% limit promulgated by the IRS. Read IRS Publication 529 for more on the limitations to these kinds of deductions.
Businesses as well have unique circumstances with penalties. For example, penalties paid by a manufacturing company due to nonperformance on a building contract are usually deductible as a business expense.
Can I Deduct Back Taxes Paid and Are Federal Tax Refunds Taxable?
YES – The IRS will accept deductions listed for state and local income taxes (SALT) accrued and paid during the current tax year. So even if you’re paying late, you can make the deduction for both the year you’re paying late and make deductions for the current year. For example, if you pay your 2017 state taxes during the 2018 calendar year, you can deduct those payments on your 2017 tax return. However, you are still not allowed to remove any interest or penalties from state and local taxes. For example, if you pay $6,000 to your state because of missed taxes during the current tax year, but $1,800 of that were incurred by interest and penalties, you may only deduct $4,200 on your federal tax return.
NO – You are never allowed to deduct federal taxes on your income tax. Let’s say you haven’t filed taxes in two years and are now paying two years’ worth of federal income taxes; you may not claim the additional deduction on this year’s taxes.
What the 2018 Tax Law Means for the SALT Tax Deduction
Starting in 2018 calendar tax year, there is a capped deduction for state and local taxes at $10,000 per year. Therefore, if you pay $7,000 in SALT and $4,000 in state real estate taxes, you may only deduct the first $10,000 under the 2018 SALT tax deduction. If you’re married, you can file separate returns, but the limit is cut to just $5,000 of state and local taxes.
