[ad_1]
If you feel like you may need to file for an extension on your taxes this year, you’re not alone. Tax Day has a way of creeping up on all of us. One minute, we’re enjoying the sunshine and cherry blossoms, and the next we realize tax deadlines are approaching and we can’t remember where we put all our documents.
The good news is that you can quickly and easily get a six-month extension to file your taxes, so you don’t have to turn in the paperwork until October 15. Unfortunately, the IRS will require you to pay any taxes. You owe by April 15 – or else.
We spoke to Enrolled Agent Nicole Rosen of Boundless Advisors to find out what taxpayers need to know about the automatic tax extension. Here’s what we learned.
How can I get an automatic extension?
To apply for an automatic extension, you will need to fill out Form 4868, Request for Automatic Extension of Time to File a U.S. Individual Income Tax Return and submit it by the April 15, 2024 tax filing deadline; You can file it electronically using IRS Free File. When you file this form, you will automatically receive a six-month extension to file your 2023 tax return. Your new due date will be October 15, 2024.
Form 4868 is relatively easy to fill out (especially compared to Form 1040 and Schedules AD). All you have to do is provide your name, address, and Social Security number, as well as your estimated tax liability for 2023 and the amount you’ve already paid. The form asks you to subtract your total payments for 2023 from your estimated liabilities to calculate your outstanding balance.
However, this extension is only intended to do the work of filing your taxes. You still must pay any taxes you owe by April 15.
“This is the number one misconception about tax extensions,” Rosen says. “You don’t get extra time to pay, and you face a nonpayment penalty, plus interest, if you wait to pay.”
How much do I owe on April 15?
Estimating your tax liability for the previous year may seem like a no-win situation for the Kobayashi Maru. Many of us learn about our liability (or overpayment, in years when we get our money back) only by doing the work of filing.
So how can you estimate liability without making a full deposit? It partly depends on how you make your money.
W-2 employees
If you’re a W-2 employee and your income hasn’t changed much since 2022, estimating your liabilities is relatively simple. Start by finding your total liabilities for 2022 and then subtract the following from that number:
- Any taxes you already paid in 2023, incl
- Money that has been withheld from your paycheck by your employer
- Any estimated tax payments you have made
- Any 2023 tax credits you qualify for, including
- The Child Tax Credit and the Child and Dependent Care Credit
- Earned Income Tax Credit
Subtracting any taxes paid for 2023 and 2023 tax credits from your 2022 tax liability should give you a reasonable approximation of your current liability.
Self-employed taxpayers
Of course, estimating your tax liability becomes more complicated if you’re a freelancer, a small business owner, or an unusual side hustler.
“That’s where having good records comes in,” Rosen says. “If someone hands me a profit and loss statement, even if there’s nothing else, I can usually get a good idea of what they should pay.” Being able to quickly reference your total P&L for 2023, even if just from a spreadsheet or business bank account, will give you a starting point to estimate your liabilities.
From your profit and loss statement, determine your tax bracket based on your total income. Marginal tax rates for 2023 range from 10% to 37% and depend on your total income and filing status. You can calculate your total tax liability using a marginal tax rate calculator like this one from Bankrate.
Once you calculate that number, subtract any taxes you paid in 2023 (generally through quarterly estimated payments) and any tax credits you qualify for. This calculation may be a bit rough, but the number you come up with will generally be a rough estimate of your commitment.
“I tell people it’s a simple tax return,” Rosen says.
Taxpayers who changed jobs
If your income changes significantly or you switch from self-employment to W-2 employment (or vice versa), your best bet is to calculate your tax liability using the IRS 1040-ES 2023 Estimated Tax Worksheet.
This is a long worksheet, but it will help you pinpoint your responsibility. This form is especially useful for taxpayers who need an extension due to significant changes in their income or employment.
What happens if I don’t pay?
There are two ways the IRS will penalize you for nonpayment: a late payment penalty and interest on the amount you owe.
Of the two, the late payment penalty is slightly less likely to give you an ulcer. The IRS charges you 0.05% per month (or part of a month) for not paying tax after the April 15 deadline. For example, if you owe $10,000 and pay on August 31 instead of April 15, you will owe a 2.5% late penalty or $250 to make your payment four full months and one partial month after the deadline.
Interest charged on unpaid taxes is where you can end up bleeding money. The IRS interest rate changes quarterly and is set by the federal short-term interest rate, plus 3%. The current interest rate for underpayment of individual taxes is 8% per year, doubling daily. The same late payment of $10,000 on August 31 would result in interest of about $307. Furthermore, interest continues to accrue until you pay what you owe.
That’s why Rosen recommends paying what you can, even if you’re not sure how much you owe. “If you have the money, pay,” she says. “All your payments will do is save you money. If you pay too much, great, you’ll get your money back!”
Sending what you can will also help your bottom line, even if you’re underestimating what you owe. “Let’s say you pay $5,000 and you owe $10,000,” Rosen says. “Well, now the penalty and interest will only be charged on the outstanding balance of $5,000 instead of the full $10,000.”
Attachments at the state level
Of course, Uncle Sam may not be the only person you owe taxes to. If you live in a state that imposes income tax, you may need to request an extension for this tax return as well.
In many states, applying for a federal tax extension automatically gives you an extension on your state taxes, while some states require a separate form to receive a state extension. All states with an income tax require that you pay tax on any balance due by the spring tax deadline if you need an extension. Find out exactly what your state requires here.
Do not panic
Even if you’re late filing your tax returns, you can get more time. As long as you pay any taxes you owe by April 15, the IRS makes it (relatively) easy to get a six-month moratorium on doing the actual work of filing your taxes.
[ad_2]
Source link
