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Color of Money Live

Michelle Singletary
Washington Post Personal Finance Columnist
Thursday, April 9, 2009 12:00 PM

Need advice about how to handle your personal taxes and finances? Post personal finance columnist Michelle Singletary and Jim Dupree, the IRS spokesman for Maryland and Metropolitan Washington, offered their advice and answer your questions on Thursday, April 9 at 12 p.m. ET.

Read Michelle's latest columns, check out her Color of Money Book Club selection archive or sign up for her weekly e-mail newsletter.

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Michelle Singletary: Welcome everyone. Sorry for the wee bit delay.

But let's get started.

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Woolwich, Maine: Reverse Mortgage deductions: HUD/FHA has steep application fees for a reverse mortgage. For ex. over $9,000 insurance fee (for a pay off of $284,000), around 3 percent.Other fees; closing costs $2,000 and fees to the bank $5,000. Total. We don't have to pay these up front, they're rolled into the reverse mortgage. So, they are probably not tax deductible now, right?

Jim Dupree: That is correct. It is not currently deductible. Generally, deductible fees can be amortized over the life of the loan.

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Baltimore, Md.: It turns out we owe quite a bit to the IRS this year (due to bonuses and stock sales last year that pushed us into a higher tax bracket). I looked at the IRS web site to see if we could pay the amount we owe in installments, but its seems like if we do so we'll have to pay a penalty plus interest on each payment. Is this correct? If we have to we can pay it all at once, but it will pretty well use all our "emergency" savings fund. But I'd rather not pay even more through interest and penalties. Thanks for your help.

Jim Dupree: You're right -- interest and penalties do not stop with an installment agreement/payment plan. You can save money by paying the full amount you owe, as quickly as possible; to minimize the interest and penalties you will be charged. Penalties and interest will continue to be charged on the unpaid portion of the debt throughout the duration of the installment agreement/payment plan.

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Washington, D.C.: Every year on April 15, the post office stays open late and people run to get their taxes in the mail (or electronically filed) by midnight. I understand that if you owe money, late payment can result in interest and penalties. But if you are you filing for a refund, is there any penalty for filing on April 16 - or May 16, for that matter?

Jim Dupree: There is no penalty assessed by the IRS for filing a late return qualifying for a refund.

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Baltimore, Md.: I just learned that my boyfriend hasn't filed his tax returns for the past 4 years -- and he says he probably should have got refunds! Do you have any advice for what he should do in this situation? I think he's afraid now to do anything now because of what might happen. I'd like to help him get this straight. Thanks

Jim Dupree: File those returns! The law provides most taxpayers with a three-year window of opportunity for claiming a refund. If no return is filed to claim the refund within three years, the money becomes property of the U.S. Treasury.

For 2005 returns, the window closes on April 15, 2009. The law requires that the return be properly addressed, postmarked and mailed by that date.

Don't worry, there is no penalty assessed by the IRS for filing a late return qualifying for a refund.

The IRS reminds taxpayers seeking a 2005 refund that their checks will be held if they have not filed tax returns for 2006 or 2007.

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Arlington, Va.: I received a payout from my uncle and aunt's trust this past year. The attorney's just sent information they filed on a Schedule K form that I am to include on my taxes. could you please tell me if I need to claim the amount I received from the inheritance or just the interest info on the Schedule K? The information I have found is unclear.

Thanks.

Jim Dupree: It depends on the type of trust. If it is inheritance benefits only the interest is taxable.

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Arlington, Va.: Can you tell me the reason I cannot claim my student loan interest if I am filing married but separate? Thank you.

Jim Dupree: It is currently the law.

Michelle Singletary: For more information on this go to this link

http://www.irs.gov/taxtopics/tc456.html

You can claim the deduction if all of the following apply:

-- You paid interest on a qualified student loan in tax year 2008

-- Your filing status is not married filing separately

-- Your modified adjusted gross income is less than $70,000 ($145,000 if filing jointly)

-- You and your spouse, if filing jointly, cannot be claimed as dependents on someone else's return

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Newton, Mass.: We just finished our taxes and we owe $9,000 beacuse my husband's company under-withheld. My husband was just layed off and we have just paid for two private college educations with no financial aid. WE have NO cash to pay the taxes - what do we do?

Michelle Singletary: You still need to file and apply for a payment plan.

What you don't want to do is NOT file.

If yo go to www.irs you can find information about setting up a payment plan.

I recently wrote about this as well. Check the archives of my columns.

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Annapolis, Md.: Michelle, I love the idea you floated a few weeks ago about people coming together to donate things they no longer need to those who can use them. I am older, with a house full of crystal, china, silver, art, and absolutely no one to leave it to. I would love to see these items in homes where they would be cherished, rather than sold after my death for pennies on the dollar to slightly help out my favorite charities. Does your church have a Web site, or do you know of other ways to get in touch with those who might be thinking of sponsoring another such exchange? I am not a churchgoer but would go to a church for the first time in many years to participate in this kind of program.

washingtonpost.com: A Call To Share Our Abundance (Color of Money, March 15)

Michelle Singletary: What a wonderful thing you are thinking of doing.

May I suggest you contact some local agencies or nonprofits that help people transition from homeless shelters to apartments or houses. Often these individuals don't have the means to furnish their places. They sometimes get big pieces such as beds, living room furniture, etc. but not the thingst that make an apartment or house a home.

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Falls Church, Va.: Michelle, My husband was laid off in November and severance has run out. We have not had to dip into savings yet. I am thinking about it though - the car insurance bill came in. Should I pay off the whole year - about 25 percent of what I have in the immediate savings account (but only 1/18th of overall savings) or pay it monthly. I kind of want to pay it all off so I don't have to think about it or worry that it will be late.

Michelle Singletary: You poor dear. I'm so sorry.

But you should use your savings. That's what it's there for. However, I wouldn't make lump sum payments right now. You need to preserve your cash. So only pay what you have to pay. For example, only pay the part of the insurance you have to pay. Only make minimum payments on your credit cards. You do this to make sure your savings last until your husband finds work.

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Syracuse, N.Y.: Good afternoon. While I have already filed my Federal return and received my refund, I now have to file an amended return since I received a Schedule K-1 form subsequent to filing. On this subject, I have two questions:

1) Do I need to file the amended return (1040X) by April 15? (If it matters, I will have to surrender part of my refund and mail a check.)

2) Do I need to include my original 1040 and a "marked up" 1040 (i.e., a 1040 with all of the corrections made) with the 1040X?

Thank you...

Jim Dupree: Amended returns can be filed after April 15th and the original does not need to be attached - as long as there is an explanation on the 1040X

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Gaithersburg, Md.: Good Morning Michelle and Jim,

I purchased my first home on January 23, 2008, since I purchased my home before April of 2008, I do not qualify for the first time home buyer credit of 7500.00 (no interest loan for 15 years).

I received a 3 percent grant from the state of Maryland and the seller paid the closing cost at settlement.

Other than the tax credit (deducting my mortgage interest and real estate taxes) are there any other deductions that I qualify for?

Kevin

Jim Dupree: If you pay mortgage insurance, the mortgage insurance premiums may be deductible. See IRS Pub 530, "Tax Information for Homebuyers," for more details.

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Relocation Expenses: Hi,

Last year I was hired by a company that paid my relocation expenses. I've completed my tax return and paid the appropriate taxes.

I'm thinking about leaving this company, but I would be responsible for paying back the relocation expenses but don't know what it would mean tax wise. Would I be able to amend my return to get the taxes I paid? Would IRS return the taxes the company paid on my behalf back to me (and then I would pay the company)?

Jim Dupree: In general, relocation expenses paid by your employer are taxable to you in the year paid to you if (1) you do not stay for the requisite period and (2) do not pay the expenses back in the same tax year in which the employer paid the expenses.

If you pay the expenses back in a later tax year, you would be entitled to a miscellaneous itemized deduction in the year of the repayment if you itemize your deductions in the year of repayment.

Note that miscellaneous itemized deductions are deductible only to the extent they exceed 2 percent of your adjusted gross income.

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Cincinnati, Ohio: Hi Michelle, here`s my dillema.I have about 20,000 in debt (14,500 suv 5,ooo credit card). I pay 492.00 for my truck, I've missed a few credit card payments resulting in some of them being closed. I want to get a loan big enough (25,000) to pay off all my credit cards and reduce my payment on my suv which has a 14 percent APR. My credit score has taken a big hit, any suggestions on the best way to amend this situation??? Thanks

Michelle Singletary: Honestly, with credit being so tight and your credit score taking a hit for those late payments you are going to find it tough to get a pesonal loan. But try a credit union.

If you can't get a loan then my dear you will have to buckle down and cut every possible expense and just pay off the credit cards and truck loan.

Start with the credit card debt first. Attack that. Make the schedule payments on the car. Once you've paid off the credit cards, take that money and apply to the car loan.

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Los Angeles: Just a follow-up to Newton, Mass. - Her husband's company didn't under-withhold - they withheld exactly what he told them to. He was the one who claimed too many deductions or otherwise told them not to withhold enough. Just a reminder to everyone to revisit your withholding occasionally to make sure it works for your situation.

Michelle Singletary: Well sometimes employers do make mistakes in withholding.

But your point is still a good one.

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Washington, D.C.: My boyfriend and I are buying a home together this year. How does the first-time homebuyer tax credit work for unmarried buyers? His AGI is too high to claim the full credit, but mine is below the threshold. Can I claim the full $8,000 credit and have him claim nothing? Or do we have to split it somehow?

Jim Dupree: Because your boyfriend's MAGI exceeds the MAGI cap, any portion of the credit allocated to him would be reduced. You both may allocate the entire allowable $8,000 credit to you because your MAGI is less than the $75,000 MAGI threshold and, therefore, you are eligible to claim the entire allowable credit.

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Madison, IN: Michelle, in your newsletter today, one of your pieces of advice to people who are let go is "If you are eligible, file for unemployment benefits." I would say that everyone should file for benefits. When I lost a job several years ago, I thought I was ineligible and so I didn't file for several months, but when I was finally persuaded to file I found that I was eligible after all. If you don't qualify, your state will tell you. Don't hurt yourself by presuming you won't qualify.

Michelle Singletary: That's is what I meant. I was really trying to say don't be too proud to file.

Anyway, thanks.

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Forestville, Md.: I'm in a similar situation as Baltimore, Md., with the boyfriend who didn't file a return that he would've received a refund on. My bf didn't file his state return (but did file his federal) for 2007. Now he has lost his W2s from his old employers. What can he do? And if he isn't able to get those W2s and is unable to file, what will happen since he's due a refund anyway?

Michelle Singletary: Seriously, what is it with all these people who don't file?

I hope those of you with triflin people not filing their tax returns are looking at how these people you are hooking up with handle their finances. I'm just saying . . .

Anyway, found this tax topic for your man:

http://www.irs.gov/taxtopics/tc159.html

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Alexandria, Va.: My question is not so much about preparing a tax return as it is about paying taxes. I am 40 years old, single, and have always expected a refund or paid my taxes by April 15. This year is different. I've found myself underemployed and making money as a contractor or my part-time business where possible. I have a tax preparer working on my taxes but I expect I will owe several thousand dollars to the IRS. I am worried that I will not have enough to both live AND pay my taxes this year. In this terrible economy, is there any kind of program that helps troubled taxpayers pay over time? Any other suggestions besides selling personal mementos to pay the IRS?

Michelle Singletary: Two words: Payment Plan.

IRS will set one up for you.

And hey, I like the idea of selling stuff. Most of us have to much stuff anyway.

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Ashland, Va.: I am a "super commuter" although that name glorifies a sad fact of my life. I take Amtrak each day about 250 miles to and from work. Is either the monthly train ticket or the monthly parking pass a deduction? If I rented a room during the week to be closer to work would that cost be a deduction?

Jim Dupree: Sorry, none of your commuting expenses are deductible. If the room was required by and to the benefit of your employer it could be deductible - if you werent reimbursed for this expense. Otherwise its a personal expense and not deductible.

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Detroit, Mich.: Hi Michelle, my wife and I were recently blessed and lucky to welcome our daughter (she is three weeks old), and are looking to cut costs and save more. Other than our mortgage, we have a monthly car payment and student loan payment, but no credit card debt. I used to work on Capitol Hill and have around 10,000 in a TPS account. I was thinking of rolling that over to my current work 401(k), but thought about using that to pay off our car, which would save us $400 a month. I know you would not usually recommend this, but I already have around $40,000 in a Roth IRA, and both my wife and I have 401(k)'s through TIA-CREF at work. Thoughts?

Michelle Singletary: First congrats on the birth of your daughter.

I have two. Much drama, but that's for another chat.

Anyway, don't cash out that TSP. It will cost you too much -- 10 percent penalty plus taxes. So you won't end up with enough to pay off the car.

I would just keep looking for ways to cut or earn more money to tackle the debts.

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Late Filing: So, if I am getting back a small refund and it would cost me more to have someone do my return than the amount I am getting back, can I just not file for a certain year?

Michelle Singletary: What, are you seriously asking me if you can NOT file so you WON'T get back money.

I don't care if it's 50 cents. File.

You do know if your income is under $58,000 you can file electronically for free. But even if your income is above that you can go to www.irs.gov and get fillable forms and file your federal return for free electronically.

That's what I would do.

Here's the link

http://www.irs.gov/efile/article/0,,id=118986,00.html?portlet=4

Scroll down on the free file page until you see this:

Free File Fillable Forms - I want to fill in the tax forms and file them online without tax software.

Choose the option for free fillable forms

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Rockville, Md.: I'm sorry if this sounds snotty but to the people asking how they can afford their taxes have to remember you only pay taxes when you make money.

Your employeer withholds so you only live on the take-home. If you have outside income (stock sales, self-employee, etc), you really need to make a payment plan to yourself so you have the money to pay your taxes. Again, you are only paying if you are earning.

And remember, if you make enough outside of your job (i.e. outside of withholdings), you have to make estimated payments through the year. You can't wait until April 15th and pay it all or you will get hit with a penalty and interest.

Michelle Singletary: Well a little snotty but you still make a good point.

It's VITAL if you have income in which taxes are not withheld that you set aside for taxes WHEN you get the money to make your tax payments.

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Falls Church, Va.: Where do you go to file for unemployment benefits?

Michelle Singletary: You file with your state.

Just go online and type in your state and "unemployment benefits" and you will find the site.

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I Don't Get It: WHY do people wait until the last minute to file their tax returns -- or to even start them? Turbo Tax is the easiest thing to use; if I owe money, I may delay pushing the "file" button until closer to April 15, but I enter all of the data in January-February. At least that way I know what I'm up against, and can plan for a couple of months how to pay it. If I'm getting a refund -- why wait? I got mine in February.

Michelle Singletary: Why?

Life my friend.

Kids. Work. Triflin relatives. Church. Ministries. Soccer. School homework.

Work.

Tired.

Hate the process.

As long as people file on time and pay when they are supposed to let them be.

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Washington, D.C.: Hi Michelle, last April 2008 my mother-in-law retired and for the past year has lived with my wife and I. Can I simply claim her as a dependant? Thanks.

Jim Dupree: You can claim her as a dependent if her income is less than the exemption amount for 2008 (generally $3,500 in 2008) and you (or you and your wife if a joint return is filed) provided over half of her support in 2008.

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Woodbridge, Va.: I am helping a friend with her taxes this year. She has not paid her mortgage (or the money for insurance and tax for her escrow account) for 18 months. (Not sure why her mortgage company hasn't moved to foreclose - although she is deeply underwater). Can she claim interest that accrued on her mortgage in 2008, and the insurance and realty taxes that were paid in her behalf, as she is legally obligated to pay, but in default?

Jim Dupree: She can claim the mortgae interest she actually paid. This amount should be reflected on an IRS Form 1098, "Mortgage Interest Statement," she received from the financial institution to which she made the payments.

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Baltimore, Md.: Hello Michelle and Jim,

In 2008 I settled some credit card debt. In January I received a Form (can't recall the exact number on it) indicating the amount forgiven might be taxable income. Is this correct? I'm normally do my own taxes but I'm thinking about having someone prepare them just to make sure everything is done correctly. Any guidance would be appreciate. Thank you!

Michelle Singletary: Sorry my friend, you may in fact have to include the forgiven debt as taxable income.

In way it does make some sense. You after all enjoyed whatever is you bought or purchased or the services used.

Now that debt is forgiven. But with the debt forgiven you gain something without paying for it. So it's like income.

Anyway, here's the IRS take on it and a link for more information:

http://www.irs.gov/taxtopics/tc431.html

The tax impact of debt forgiveness or cancellation depends on your individual facts and circumstances. Generally, if you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

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Olney, Md.: Good afternoon. I love theses chats and appreciate you taking my questions. I am a fed employee and contribute to retirement through TSP. A lot of feds have experienced losses (some large losses) to our TSP accounts. Can we deduct these losses to our retirement accounts due to recession? Also, I have a small annuity from a previous employer that I cannot contribute to because I no longer work there. That account also has experienced a loss. Can that loss be deductible? Thanks.

Jim Dupree: The amounts contributed by you and the U.S. government are not taxable until you receive them. Sorry, any reduction in the value of your TSP account is not a deductible loss.

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Self-employed: I started working as an independent contractor several years ago and the first tax bill was a shock! Even if you deduct every penny of business expenses, you can't escape that self-employment tax.

The challenge isn't just paying your 2008 tax bill - you need to start planning for 2009 and start paying estimated taxes as well. Otherwise you face this problem year after year.

Michelle Singletary: Exactly!!!

Thanks.

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Well sometimes employers do make mistakes in withholding. : Mine sure did. It's my fault for not double checking, and making sure it was correct. But it was way off.

Michelle Singletary: See, told you so.

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Washington, D.C.: I lost two homes to foreclosure in 2008. What tax responsibilty do I have for these losses? How do I report the 1099 figures on my tax return?

Michelle Singletary: Go to the IRS web site. There is lots of information about debt forgiven relating to a foreclosed primary property.

Look under

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

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Silver Spring, Md.: Good morning Michelle. I haven't filed my 2006 taxes, so I never received a stimulus check. (I never owe money.) I know I must file this year and I plan to use Turbo Tax software. Do you know if the software is programmed to account for the stimulus, or will I need to submit an separate form? Thank you!

Michelle Singletary: The software should apply the stimulus money.

If not, go see a real person. OR call the IRS.

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you asked ex-debtors for feedback: Last time, a reader from New York asked: "We hear all these great stories of people pulling themselves out of debt, but I wonder how sustainable it is? .... what -have] individuals done to ensure that they don't "backslide" and give in to some of the impulses that got them into trouble in the first place? ----

In October of 2005, I paid off the last of $92,000 in debt. (None of that was secured debt, i.e., mortgage or car or even education; it was all credit cards, IRS and family members.) I have been debt-free ever since. I honestly have never been tempted to backslide because I paid it all off slowly (read: painfully, without a quick fix) AND because of the near-constant sense of freedom and happiness I have felt since that day. It was awful for me, carrying around that burden of worry and shame, and no pair of shoes could make me feel better than I felt on the day I paid it off. The slow pace with which I paid if off made it real to me (plastic money doesn't seem real, which helped me get into debt in the first place).

Honestly, I get choked up even now thinking about how relieved and grateful I am. No backsliding here. I do have a mortgage now, something that would have been impossible before, and I am on track to pay it off way before it's due. My finances are ultra-simple and manageable. I really love my life, and the thought of going back to that level of anxiety... well, no way.

Michelle Singletary: Love your testimony. Thanks for coming back to give it!

Now go forth and make other debt-free disciples!

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Syracuse, NY (1040X followup): Thank you for answering my initial question above. However, I was wondering if I need to file an "amended 1040" along with the 1040X.

As you know, the 1040X is really a stripped-down version of the 1040 and doesn't have the detailed line items that the 1040 contains. My amended return would change 8 or 9 line items on the original 1040 I submitted. That's why I was wondering if the IRS would like to see this marked up version of the 1040.

In doing a simple search among tax professionals on the Internet, the opinion is divided (almost 50-50, it seems) regarding whether an amended 1040 should be included or not.

Your help is most appreciated.

Thanks.

P.S. Love your columns and chats Michelle.

Jim Dupree: We already have your original return, and will be able to refer to it when we receive your ammended return.

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Roanoke, Va.: I purchased a house in March 2009 and was told I can claim the $8,000 first time home buyers credit on my 2008 taxes. How do I do this? I would like to file the taxes myself.

Michelle Singletary: The IRS has an entire section devoted to this credit.

Here's the link

http://www.irs.gov/newsroom/article/0,,id=187935,00.html

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Painless saving tip: We toss change in a container and much to our surprise in 7 months we saved almost $300. That's enough money to finance a trip for our family to a local amusement park for the day or several movies in the summer.

Michelle Singletary: Love this tip.

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Ethical quandary: Hi. Love your columns and chats. Using your advice, I'm steadily chipping away at my debt. I'm on track to pay off two credit cards by the end of the summer! Here's my quandary. I've been considering picking up a second job so I can pay down the debt faster. My monthly income is sufficient to pay the bills, all the minimums on debt plus extra to the lowest balance. I don't NEED a second job like so many people do to put on food on the table or keep a roof over their heads. Some of my colleagues, in fact, were just laid off. I'm worried my getting a second job taking that retail job away from someone without any job. While I admit I may be looking for a reason not to work more hours in a day, it's a valid concern. How do you choose between doing what's right for you financially and doing what's right for the larger community?

Michelle Singletary: Being in debt is not good. So you have a good and moral reason to get another job.

Don't feel guilty. Get to workin'

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Boston, Ma.: my husband and I live paycheck to paycheck because of our debt. While we are working on that, our taxes say we make enough that we still owe the Federal and State Governments money - more we don't have available right now. How do we find a way to pay this? Who do we even ask? Thanks you for your help

Jim Dupree: Don't worry... If you cannot pay the full amount of taxes you owe by the April deadline, you should still file your return by the deadline and pay as much as you can to avoid penalties and interest.

You also should contact the IRS to discuss your payment options at 1-800-829-1040.

The agency may be able to provide some relief such as a short-term extension to pay, an installment agreement or an offer in compromise.

In some cases, the agency may be able to waive penalties. However, the agency is unable to waive interest charges which accrue on unpaid tax bills.

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Michelle Singletary: Wow, again as always seems like this hour goes by so fast.

And again, I'm sorry if we didn't get to your questions. Please know I appreciate your submitting questions and hate that I can't get to them all. But please sign up for and look out for my weekly eletter. You may see your question answered there. I'll also try to answer some in my print column.

Thanks for joining me today. And thanks to Jim.

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