Here we are again. Just a day away from another tax deadline. If you haven’t filed yet, you have until midnight Monday, May 17th, to file. Here are some last-minute tips.
You can still reduce your tax bill
If you’ve been waiting to file because you know you will owe money, you still have a chance to reduce your tax bill. If you qualify, you can contribute to a traditional IRA and/or an HSA. With the traditional IRA, you can reduce your taxable income by up to $6,000 (or $7,000 if you’re 50 or older). You can also reduce individual income by $3,550 with an HSA, or, if have a family HSA by $7,100. Add another $1000 to your maximum HSA contributions if you’re 55 over. Depending on your marginal tax bracket, this can save you a couple of thousand dollars.
Similarly, if you’re self-employed, you can still open and fund a SEP-IRA before the deadline. This deduction can get you the most bang for your buck because you can contribute the lesser of 25% of compensation or $57,000. You get a business deduction for the contributions you make to your employees’ accounts, and you can deduct 20% of your net earnings for contributions to your account.
Understand what you’re signing
It’s tempting to sign the return your preparer has completed without even looking at it. Don’t do that. Even if someone else prepares the return, you are ultimately responsible for it. So, take the time to understand your income and deductions for 2020.
File an extension if you need more time
If you don’t think you’ll make the deadline, you can file Form 4868 to request an extension.
You can file the form online if you or your tax professional has E-file access. Or you can mail the paper form to one of the IRS service centers. (You can find your particular service center on the form’s instructions.) If you choose to mail the form, make sure to get it postmarked by 5/17.
The 4868 is pretty straightforward. You fill in your contact information (name, address, and social security number), estimate your tax liability, and make a payment if you need.
Some people freak out about the balance due estimation because the IRS says in the instructions: “If we later find that the estimate was not reasonable, the extension will be null and void.” However, you just need to make the best estimation with the information you have.
So, if you had a balance the year before and are making a similar amount of income, you will likely owe about the same. You can also adjust accordingly for any increase or decreases in your income.
If the IRS accepts your extension request, you get an additional six months to file your return. But remember, the extension only gives you extra time to file, not to pay. If it turns out that you didn’t correctly estimate your balance due, you will owe interest on any shortfall when you file, and you may be assessed with a “failure-to-pay” penalty. (Although owing a balance or filing the form without payment doesn’t negate the extension.)
You should also keep in mind that this deadline only applies to you if you owe money on your tax return. If you are due a refund, you have three years from the due date, including extensions, or two years from when tax is paid, to file your return and collect your money. However, the longer you wait, the longer you give the IRS an interest-free loan. So, file as soon as you can.
Watch out for those penalties
If you don’t file on time or file an extension, you will pay a penalty.
The most substantial penalty you face for missing the deadline is the failure-to-file penalty. that’s the penalty for failing to file on time. Again, you can skirt this penalty by filing Form 4868. Unfortunately, there’s no way to avoid this penalty if you miss the second deadline.
The failure-to-file penalty is 5 percent of the unpaid taxes for each month or part of a month that your return is late, up to 25% of the unpaid taxes. If you file your return more than 60 days after the due date, the minimum penalty is the smaller of $435 or the unpaid tax.
Along with the failure-to-file penalty, you will likely receive the failure-to-pay penalty. Again, the name is pretty self-explanatory: you incur this penalty for not paying your tax balance on time. The failure-to-pay penalty is ½ of 1 percent (.005) of your unpaid taxes for each month or part of a month you have not paid after the due date.
Like the failure-to-file penalty, this penalty can rise as high as 25% of your unpaid taxes. However, unlike the failure-to-file penalty, the failure-to-pay penalty can’t be avoided by you filing for an extension. You have to pay at least 90% of your tax liability by the due date and the balance by the extension date if you want to avoid the failure to pay penalty. You may get a slight reduction in penalties if you incur them together.
You have options if you can’t pay the amount you owe
You may find that you owe more on your tax return than you previously thought and can’t afford to pay the balance in full. That’s okay. There are plenty of options to resolve your tax debt. For example, you can apply for an installment agreement or hardship status.
Under the IRS’ Fresh Start initiative, individual taxpayers who owe less than $50,000 can easily set up a payment plan if the taxpayer pays his or her debt in full within 72 months (6 years). You can request the agreement online or mail-in Form 9465 to a service center. Keep in mind that it may take the IRS a while to set up an installment agreement requested through the mail, as the service centers are behind.
If you need longer than 72 months to pay your debt or you owe more than $50,000, the IRS will request a Collection Information Statement (Form 433-A or Form 433-F). These forms provide an in-depth analysis of your assets, as well as your income and expenses to help determine what you can pay on a regular basis. For example, if the financial statement shows that you can only afford $400 a month after you’ve paid your necessary expenses, that will be the amount of your installment agreement. These financial statements also play an important role in the other resolutions you may obtain.
You can find more details about these resolution options here.
I know you may be anxious during these last couple of days before the tax deadline if you still have to file. I hope you’ll take some solace in understanding your options and the rules of the game. If you are still overwhelmed and need guidance, it’s best to contact a tax professional — either a lawyer, CPA, or Enrolled Agent — who is authorized to represent you before the IRS.
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Last-Minute Tips For Monday’s Tax Deadline - Forbes
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