When January comes around, it’s normal for your attention to turn to tax season. For some, filing late is almost a tradition, like fireworks on the Fourth of July or carving pumpkins for Halloween. However, it’s better to mark your calendar like you would any other important date. Otherwise Uncle Sam’s tax bill may put a damper on your celebration for the rest of the year.
File on time
Unless you expect a refund, you will likely face penalties if you file late or pay any taxes due after tax day. If you don’t file on time, the IRS considers your delay a “failure to file.” As a result, you’ll pay 5% of net taxes due for each month and/or portion of a month you are late filing your return. This penalty is capped at 25% of net taxes due.
That’s not all, though. The IRS also charges interest on top of the penalties and tax liability not paid. As you can see, it’ll cost you a lot more, if you don’t file on time.
File an extension
If you truly can’t file on time, apply for an extension using IRS Form 4868, the Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Form 4868 extends your filing deadline for six months. You’ll still have to make an estimated payment in the interim if you owe. As long as you pay at least 90% of the actual taxes due, you’ll avoid the penalty. Consult with your tax advisor to help calculate the estimated tax due.
The IRS accepts this form if it’s properly filled out and filed on or before tax day. You can complete and submit the form online using your tax provider software or the IRS’ Free-File program. You can also send a paper copy by mail.
How to reduce or eliminate owing taxes
Work with a tax professional to leave no stone unturned to reduce your taxable income and tax bill. To eliminate or reduce the amount you owe next year:
- Adjust withholdings from your pay.
- Have an additional fixed amount taken from your pay.
- Make full use of available deductions, and potential write-offs and credits.
Pay your taxes due
Procrastination doesn’t pay. In fact, it’ll cost you. Unfortunately, there is no form to complete to get an extension for payment. If you owe, the meter starts on tax day. The IRS charges a penalty of 0.5% for each month you are late paying the amount due up to a maximum of 25%. In addition, you will pay interest on outstanding tax debt until it is paid.
If you owe taxes, the IRS is willing to work out a payment plan with you. The late payment penalty is reduced to 0.25%, but you’ll still have interest due on unpaid tax amounts. If you don’t communicate with the IRS, they may seek a court judgment against you resulting in additional penalties or possibly freezing funds in your financial accounts up to the amount of taxes due.
Don’t land in the penalty box
Let’s say it’s the day before tax day and you haven’t filed your tax return. You figure you might owe $2,000 in taxes. If you don’t apply for an extension by tax day and pay 90% of the estimated taxes due, you will be subject to penalty.
Example 1: If you file on time or you file an extension, but do not pay taxes until October 15, you’ll avoid the failure to pay penalty, which amounts to $60 (0.5% x $2,000 X 6 months) plus interest.
Example 2: If you do not file your return or pay your taxes until October 15, you’ll face:
- A failure to file penalty, which is capped at $500
- A failure to pay penalty of $60 plus interest
Penalties are capped at 25% of taxes due, so the maximum becomes $500 plus interest.
The takeaway here: Not filing is almost nine times more expensive in Example 2. If necessary, remember you can file Form 4868 to receive a six-month extension to October 15.
Be better prepared at tax season
Prepare for tax season all year by collecting and organizing your records well ahead of time. Then make a plan to complete your return:
- Complete your taxes yourself by using, Free File, the IRS’ online tax preparation site.
- Use TurboTax to prepare your taxes online and receive an LGFCU member discount. Start for free.
- If you have basic tax preparation needs, low-cost tax help is available at your local branch, subject to eligibility.
The advice provided is for informational purposes only. Contact a tax advisor for additional guidance.