If you were worried about filing your taxes on time this year, feel free to breathe a sigh of relief. The IRS announced an extension of the deadline for 2020 tax returns from April 15th to Monday, May 17th. But if you need more time to organize your documents, you can still get an extension, which is good through October 15th.
Tax Strategies are also now extended to May 17th
In addition to an extra month to file your tax return or your extension, you also get the extra month to implement some tax strategies. Most notably, you can make back-dated IRA contribution (Traditional & Roth), back-dated HSA (Health Savings Account) contributions, and back-dated AZ Charity Tax Credits, up to May 17th, instead of the normal deadline of April 15th.
What Is an Extension?
An extension is a simple one-page piece of paper, that we submit electronically to the IRS, that tells them your name, address, and social security number, as well as an estimate of how much you think you’ll owe when your tax return is completed. Filing this extension does not increase your risk of audit nor does it create any black mark on your record.
What if I Owe?
If you will owe money when your tax return is completed, we highly recommend you pay your balance on or before May 17th. There are several ways to do this.
- Write a check and mail it to the IRS (and another one to your state)
- Pay it online at irs.gov (selecting Extension Payment as your reason)
- You can pay AZ tax at aztaxes.gov
- Have Royce CPAs set up an ACH from your bank account so you don’t have to do anything!
What if I don’t?
Perhaps you don’t have the cash available right now. Or perhaps you don’t have enough information to determine the amount you actually owe. Either way, if you pay your taxes after May 17th, the IRS will charge penalties and interest.
How to Calculate Penalties
The penalty for late payment of taxes is 0.5% of the balance for each month (or partial month) that it’s late. For example, if your balance due is $10,000, and you pay the tax on May 21st (instead of May 17th), the penalty will be $50. If you wait and pay the tax in October, the penalty will be $300 ($10,000 * 0.5% * 6 months). As you can see, these can add up quickly, but may not be enough to break the bank.
How to Calculate Interest
In addition to the Late Payment Penalty described above, the IRS will also charge you interest. It’s calculated at the Federal Short-Term Rate plus 3 percent, and compounds daily. Because interest rates are so low, at the time of this writing, the interest rate is 3%. Continuing with the example above, if you paid your $10,000 balance due on May 21st, you would be charged interest of $4, whereas if you waited until October 15th to make your payment, you would be charged interest of approximately $125. While you don’t want to get behind on payments to the IRS, you can see the interest they charge is much less than you’d pay if you financed the $10,000 for 5 months on a credit card!
Is the Extension Right for You?
An Extension is a great tool and should be embraced, especially this year as tax laws have been changing so rapidly. For example, maybe your business just discovered that it’s eligible for the retroactive ERC (Employee Retention Credit). Therefore, additional time is needed to calculate that refund and report it properly on your 2020 tax return. It would be foolish to rush and file your tax return “on time” and miss out on this benefit or have to deal with the hassles of amending your return.
Get Help Filing Your Taxes This Year
2020 was an unusual year. Between the global pandemic, stimulus checks, and changes to tax deductions, it can be an especially confusing time to file your taxes.
At The Royce CPA Firm, we will worry about your taxes so you don’t have to. We offer tax preparation services for individuals and families. Learn more about the service and sign up here.
You can also call us at (520) 321-4626 for tax tips and tricks.