Questions of the Week
Last-Minute Tips for Monday’s Deadline
Happy Friday, all!
Here we are again. Just a day away from another tax deadline. For those who still need to file, you have until midnight next Monday, May 17th, to file. I want to offer some last-minute tips for you.
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. You reduce your taxable income by $6,000 (or $7,000 if you’re 50 or older) by maxing out a traditional IRA. You can reduce your income by $7,100 if you have a family HSA or $3,550 if you have an individual plan. You can add $1000 to your 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
I know it’s tempting to sign the return your preparer has completed without reviewing 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 Efile 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 to.
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. You should know that the extension only gives you extra time to file, not pay. If it turns out that you didn’t correctly estimate your balance due, you will owe interest when you do file and may incur 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.
Quote of the Week
“Dreams without deadlines are dead in the water. Deadlines are lifelines to achieving our goals.” – Mark Batterson
Task of the Week
I know you may be anxious during these last few 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.