Questions of the Week
Last-Minute Tips for Tuesday’s Deadline
Happy Friday, all!
Here we are again. Just a few days away from another tax deadline. For those who still need to file, you have until midnight next Tuesday, April 18th, to file. If you’re curious why Tuesday and not Monday, Monday is Emancipation Day in DC.
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. By maxing out a traditional IRA, you reduce your taxable income by $6,000 (or $7,000 if you’re 50 or older). In addition, you can reduce your income by $7,300 if you have a family HSA or $3,650 if you have an individual plan. In addition, you can add $1000 to your HSA contributions if you’re 55 or 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. In addition, you get a business deduction for your contributions to your employees’ accounts, and you can deduct 20% of your net earnings for contributions to your account. I like Solo 401ks better than SEP-IRAs, but SEPs are an excellent second choice if you need them.
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. So take the time to understand your income and deductions for 2022.
File an extension if you need more time
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 service center on the form’s instructions.) If you choose to mail the form, make sure to get it postmarked by 4/18.
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 necessary.
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 decrease in your income.
If the IRS accepts your extension request, you get six more 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.
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 that owe under $50,000 can easily set up a payment plan if the taxpayer pays their debt in full within 72 months (6 years). You can request the agreement online or mail-in Form 9465 to a service center. However, 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 more than 72 months to pay your debt or 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 and your income and expenses to help determine what you can pay regularly. 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 essential role in the other resolutions you may obtain.
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
If you still have to file, you may be anxious during these last few days before the tax deadline. 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 — a lawyer, CPA, or Enrolled Agent — who is authorized to represent you before the IRS.