As if anyone needed more bad news during the Coronavirus pandemic, Tax Day 2020 is just around the corner. The tax deadline for your 2019 tax filing is July 15th, 2020. If you are reading this, I am guessing you typically wait until the absolute last moment to file your taxes.
For those of you who are unable or unwilling to get your taxes done by that deadline, you may request an extension to file. In case you were wondering, the deadline to apply for tax extension also falls on July 15th. The good news here is that applying for a tax extension could be one of the most manageable parts of the tax filing process.
There is no shame in filing for a tax extension. I’d rather see you file for an extension than make a mistake on your taxes that could lead to an audit. I’m still guessing some of you will procrastinate and wait until the night before or day of the tax-filing deadline to file regardless of anything else going on in the world. With that in mind, I work with many clients who own businesses and have more complicated tax situations. Even when you are organized and have given everything to your tax experts early- you will still often end up filing on a tax extension.
The reality is, the more complex your financial situation is, the more likely you are to need a tax extension. This year particularly, many business owners may have trouble paying their 2019 taxes. With the delay in filing, most people should have received all of their tax forms. In a typical year, many people have to wait on tax forms like a k-1. For those who own businesses or are self-employed, you may be filing tax returns for your business as well as yourself as an individual. The good news is this also brings with it many more opportunities for proactive tax planning, not to mention tax-saving retirement plans like Solo 401(k)s or even Cash Balance Pension Plans. There is still time to open and fund a SEP IRA, Roth IRA, or Traditional IRA for 2019.
What does a Tax Extension mean in 2020?
It is important to note that an extension only applies to an additional time frame to file your taxes. You will still need to pay any taxes owed to the government by July 15th. If you are unable to pay your taxes in full, the IRS may be willing to offer a payment plan.
You can potentially also pay with a credit card. We go further into when this is a good idea in this post, also for Forbes.com. As a fiduciary financial planner, if you don’t have the money to pay now, using a credit card to pay your taxes will likely not be a good idea. There are occasions when it can make sense, like when you are trying to hit a spending threshold for a credit card signup bonus.
Here is How You Can Easily File for a Tax Extension.
You simply head over to the IRS website and fill out IRS form 4868. You can access this form directly from this link. You can do this filing yourself, and it is free. If you are working with a paid tax preparer or CPA, that person will likely take care of this for you, but make sure to confirm it has been filed. Form 4868 will only apply to your federal tax extension. Many states will also require you to file for an extension directly with the state. I won’t be listing the requirement of each state, so take a second and check with your state tax authority to see what form, if any, is needed to file an extension.
For the do-it-yourself tax preparers out there, tax software, like Turbo Tax, should have an option to file for an extension within the tax-filing software. If you are in the middle of filing with them, this may be an easier way to file for a tax extension. If not, you can simply use the IRS form listed above.
You will have to answer a few short questions to file for an extension. The big ones are estimated taxes owed, as well as the approximate amount of taxes already paid. Beyond that, receiving a tax extension is basically an automatic process. You will not be required to provide an excuse in order to file late. Assuming you fill in the form entirely and correctly, your tax extension filing will be granted. With a tax extension, you will have extra months to file. That means your new tax deadline will be October 15th, 2020, to file your 2019 taxes. Please, pretty please, don’t procrastinate until October 14th to begin filing last year’s taxes. The later you submit, the more likely you are to make costly tax mistakes.
What Happens When You Don’t File for a Tax Extension?
The IRS likes to pile on penalties and interest to taxpayers who don’t meet its tax filing deadlines. The late-filing penalty is 5%, per month, on any unpaid taxes. This caps out at 25% of unpaid taxes. For those who do file on time, but who may forget to pay on time, you will get slapped with a failure to pay penalty of 0.5% of unpaid taxes, per month. This will continue until you are up to date. Getting hit with these penalties is just a big waste of money.