Your Money: Paying taxes if you're out of work

It hurts paying taxes no matter how much you make. But what if you are out of work and don't have the money to pay by today's April 17 deadline?

Herewith we offer some tips for taxpayers who are unemployed and can't pay their taxes on time. The Internal Revenue Service has a new form for you! The IRS is trying to provide what's called "penalty relief" to unemployed taxpayers. Some who have been out of work for 30 days or longer will be able to avoid failure-to-pay penalties, according to Isdaner & Co., certified public accountants based in Bala Cynwyd.

To assist those most in need, the IRS is giving a six-month grace period on failure-to-pay penalties to certain wage earners and self-employed individuals. But you have to apply by today and fill out the paperwork requesting an extension. Only then will you get relief from the failure-to-pay penalty for tax year 2011 – and only if the tax, interest, and any other penalties are fully paid by Oct. 15, 2012.

The penalty relief will be available to two categories of taxpayers:

There are income limits. Your income cannot exceed $200,000 if you are married filing jointly ($100,000 if filing as single or head of household). This penalty relief is also restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.

Eligible taxpayers meeting these criteria need to complete some paperwork (the new IRS form 1127A) to seek the 2011 penalty relief. The new form is available on the IRS website. Your application must be filed by the end of Tuesday.

Note: If you have only so much money available to pay the balance of your taxes, it's generally best to pay the 2011 amounts due the IRS and/or the states first, and hold off on paying estimated 2012 taxes, says Martin Abo of Abo & Co., certified public accountants.

Egan-Jones downgrades U.S. again

Egan-Jones, the Haverford-based independent rating agency, again downgraded the U.S. sovereign debt from AA+ to AA, with a negative outlook.

"For the first time since WWII," the U.S. debt is on track to exceed 100 percent of GDP, the agency wrote in its downgrade note last week. From 2008 to 2010, government debt rose 23.6 percent while GDP rose just 1.6 percent. With an annual federal budget deficit in the area of $1.4 trillion, debt is likely to reach $16.7 trillion as of the end of 2012. Assuming GDP grows 2.5 percent this year, total GDP is likely to reach $15.7 trillion.

"Therefore, as of the end of 2012, debt-to-GDP is likely to be in the area of 106 percent. Assuming the federal deficit for 2013 remains at $1.4 trillion and GDP growth is 2.5 percent, the total debt will rise to $18.1 trillion and GDP will rise to $16.1 trillion, resulting in debt to GDP of 112 percent. In comparison, France's and Italy's debt to GDP are 81 percent and 117 percent, respectively," the agency added.

The significance is that such a debt burden is uncomfortably high for a top-tier borrower such as the U.S. government. The effect is that even while the economy recovers, the country's debt burden is growing, and that calls into question the quality of U.S. credit. Will investors start drawing comparisons between U.S. debt and that of Greece or Spain? If they do, Treasury bond prices could fall precipitously. That could mean the government will have to pay higher yields on Treasuries, with resultant lower bond prices.

If you're bearish on Treasuries, one way to trade on this news is an exchange-traded fund such as ProShares Short 20+ Year Treasury (symbol: TBF). This ETF allows investors to go "short," or make a financial wager against Treasuries going up in price. Last year, long-term Treasuries were among the best-performing assets in the markets, and some smart money investors have been assuming the bull market in Treasury bonds can't last.

The Inquirer has written extensively about Egan-Jones, which was the first agency to downgrade the United States from its longtime AAA rating last summer. This time around, Egan-Jones also notes that yields on 10-year Treasury notes have fallen to their lowest since early February 2010 amid the Federal Reserve's aggressive purchases of U.S. Treasuries. A rise in interest rates would place pressure on the United States' credit quality, and "excess growth of money supply (i.e., debt monetization) harms creditors and ultimately, the economy. Weak debt reduction efforts force a negative watch."

Erin Arvedlund is a finance reporter in Philadelphia. Contact her at 646-797-0759 or erinarvedlund@yahoo.com. Read more of her columns at www.philly.com/arvedlund