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Federal Reserve's interest rate hike affects home loans, credit card balances and tax bills


The only folks cheering the Federal Reserve's expected decision to hike its benchmark federal funds rate by a quarter-percentage point — to a range between 1.75 percent and 2 percent — are those with savings that earn interest.

But relatively speaking, there aren't that many of us. Plus, we all know that banks and other financial institutions are going to be slow to increase the interest they pay us for holding our money and when they do, the hikes will be small.

Meanwhile, if you are trying to get a mortgage, don't panic but move that process along as quickly as you can. Interest rates on home loans — new ones, as well as home equity loans and adjustable rate mortgages already in place — will rise.

If you carry a credit card or other revolving account balance, consider paying as much as you can as quickly as you can. Even if you don't buy another thing with that plastic (fat chance!), your credit card bill will be going up because of the increased interest rates.

One estimate is that consumers will face an additional $2.2 billion in interest payments annually on their credit card debt thanks to the rate hikes.

Tax bills affected, too: The coming higher interest rates also could affect your taxes.

I'm not just talking about the tax bills you pay on the more expensive to use credit cards. I'm talking about taxes that, for whatever reason, you don't pay at all or on time.

We're all well aware that Uncle Sam collects more money from us in penalties and interest when we mess up our tax filings or payments. While in some cases the Internal Revenue Service can waive or lessen penalties, that's not the case with interest.

The IRS doesn't remove or reduce interest for reasonable cause or as first-time relief. Interest is charged by law and will continue to accrue until the account is full paid.

And the rate that the IRS charges for our tax transgressions is based on the federal short-term rate. It takes that rate and adds 3 percent.

When the federal funds mark hovered barely above zero in recent quarters (and years, notably from 2012 through 2015), that meant that the IRS interest rate the IRS interest rate settled in at 3 percent.

It edged up a percent point in the second quarter of 2016. Then earlier this year, it was bumped, for most tax situations, to 5 percent.

On June 8, the IRS announced that 5 percent rate will remain in place for the calendar quarter beginning July 1. Specifically, those rates are:

  • 5 percent for over payments, 4 percent in the case of a corporation;
  • 2.5 percent for the portion of a corporate over payment exceeding $10,000;
  • 5 percent for underpayments; and
  • 7 percent for large corporate underpayments. 

These most recent interest rates were calculated from the federal short-term rate determined during April 2018. You can read the details on that math in IRS Revenue Ruling 2018-18, which will become official when it is published in Internal Revenue Bulletin 2018-26, dated June 25, 2018.

Look for the IRS' rates to go up when the next quarter's calculation is made.

When you owe penalties: These latest rates and any higher ones that are likely since the Fed has made it clear it thinks it needs to raise rates to stave off inflation mean bigger tax bills if you owe.

The interest is part of it, but there also are those pesky penalties.

Tax penalties typically are assessed when you fail to pay your taxes at all or are late in paying the U.S. Treasury. You also get whacked when you owe taxes and don't file a return.

Here's what the IRS says about when the most common penalties apply:

  • Failure to file: When you don't file your tax return by the April return due date or the extended due date if you properly sought that additional time (until Oct. 15) to submit your return.
  • Failure to pay: When you don't pay the taxes reported on your return in full by the April due date. An extension to file your tax return forms doesn't extend the time to pay.
  • Failure to pay proper estimated tax: When you don't pay enough taxes due for the year with your quarterly estimated tax payments, which are due the 15th of April, June, September and January of the following year.

How much you'll owe in penalties: OK, you know you're going to get whacked by the IRS for not paying or filing on time. Just how big will the ding be?

The failure to file penalty is 5 percent of unpaid tax required to be reported. If you face both failure to file and failure to pay penalties, the filing penalty is reduced by the nonpayment penalty amount for any month where both penalties apply. In addition, the failure to file penalty:

  • Is charged each month or part of a month the return is late, up to five months.
  • Applies for a full month, even if the return is filed less than 30 days late.
  • Is assessed on income tax returns that are filed more than 60 days after the return due date, including extensions. The minimum penalty is the lesser of 100 percent of the tax due or specific dollar amount that is adjusted annually for inflation. For returns due after January 2018, that's $210.

The failure to pay penalty is 0.5 percent of tax not paid by the April tax filing due date. It is a recurring charge on the remaining unpaid tax each month or part of a month following the due date, until the tax is fully paid or until 25 percent is reached. The full monthly charge applies, even if the tax is paid before the month ends.

The failure to pay tax penalty is assessed again unpaid tax on your original return that is not paid in full within 21 days of the date you receive notice and demand from the IRS. That payment period is cut to 10 business days if the amount the IRS says you owe is $100,000 or more. In these cases, the penalty is 0.5 percent of the unpaid tax. As in other penalty situations, this is a recurring charge on the remaining unpaid tax each month or part of a month following the due date, until the tax is fully paid and applies for the full month even if the tax is paid before the month ends.

The failure to pay proper estimated tax penalty is calculated by the IRS separately for each of the four required installment periods. The number of days late is first determined and then multiplied by the effective interest rate for the installment period.

When you take these penalty amounts and then added interest, the costs to delinquent taxpayers could be substantial.

And that amount will only grow as the Fed, as it has indicated, increases rates over the near term.

So if you owe, pay as much as you can as soon as you can. Any amount you remit to the IRS will reduce your penalty and interest charges, which are only going to increase.

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