Being able to count the days left to file your taxes, on one hand, is far from comforting.
Crunch time only adds to your stress levels and the odds of making a mistake – or missing out on a good tax break. Tax rules change constantly and most people couldn’t possibly keep up.
“It’s sort of like trying to fix your car once a year,” said Henry Grzes, lead manager for Tax Practice & Ethics with the American Institute of CPAs.
“It used to be back in the day you could change a spark plug, you could change an air filter. Not many people do that anymore because it’s just way too complicated.”
More people, no doubt, will be doing their own taxes in the days ahead than changing their spark plugs, thanks to tax software.
The Internal Revenue Service received nearly 42 million e-filed returns that were self-prepared through April 1 – and 45.9 million returns filed by tax professionals.
The total returns that the IRS received hit nearly 91.3 million through April 1 – down 2.1% from a year ago.
The average refund was $3,226 – up 11.5% from the same time a year ago.
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Waiting until the last minute can create trouble whether you’re a do-it-yourself filer or one who pays a tax professional.
Either way, you need to take time to gather all the necessary paperwork, consider what has changed in your life that needs to be taken into account at tax time, and consider if, maybe, you need to file an extension.
Here’s a look at what last-minute filers need to know:
Why file for an IRS extension?
The extension is especially important if you owe taxes.
You want to avoid a very steep failure to file penalty, which is 5% of the unpaid taxes for each month or part of a month that a tax return is late. The late filing penalty won’t exceed 25% of your unpaid taxes.
On $1,000 owed in taxes, you’re looking at paying $250 alone for failing to file a return for five months.
By contrast, Grzes said, you’d pay $25 or so on that $1,000 if you file an extension and owe a failure-to-pay penalty over five months — and you’d owe interest, which currently would add another $17 or so to the bill over five months.
It’s far better to be dealing with paying an extra $42 or so than paying out an extra $250 or more if you owe $1,000.
The failure-to-pay penalty is 0.5% for each month or part of a month, up to a maximum of 25% of the amount that remains unpaid from the due date of the return until the tax is paid in full.
Interest varies on a quarterly basis. The current IRS interest rate for the quarter beginning April 1 is 4% per year.
The IRS system for penalties and interest is quite complex but it’s safe to say that your best bet is to request an automatic six-month extension and pay as much as you’re able by the deadline of April 18. Or consider entering into an installment plan with the IRS.
Some people whose situations haven’t changed much over the years, Grzes said, know they always owe $500 or $1,000 every year and they’re much better off paying a guesstimated amount by April 18 if they file an extension.
“Even if you over pay, you’re going to get it back,” he said. “If you can closely approximate your liability, you should pay it when it’s due.”
The IRS, he said, is only going to charge you interest on the amount you owe that remains unpaid after April 18.
How to file an extension
Regardless of your income, you can go to IRS.gov to use “Free File” to electronically request an automatic six-month extension. No fee is charged.
You’d pick a firm that’s participating in the “Free File” program, such as TaxSlayer, TaxAct, and others.
Taxpayers need to fill out Form 4868 to file for an extension, which gives them until Oct. 17 to file a return.
The IRS estimates that 15.2 million taxpayers will file a Form 4868 in 2022. Nearly 11.6 million taxpayers filed Form 4868 in 2020, based on the most recent data; and an estimated 13.56 million filed for an extension in 2021.
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You’re getting more time to file a completed return, not more time to pay your tax bill. You should pay any amount due to avoid interest and penalties.
Taxpayers also need to check out rules relating to an extension for their state income tax return or city return, if necessary.
You might want more time to do your taxes, such as if you’re still not sure how much money you received in stimulus cash or the advance child tax credit.
Or maybe you’ve misplaced some key paperwork, like W-2 forms. Or you want to buy a little more time to double check your deductions.
Or maybe you misplaced a 1099-G to report jobless benefits received in 2021 on this tax season’s return. Jobless benefits are taxable income in 2021, unlike last year when there was a limited, temporary break.
“You want to file an extension when you do not have the information necessary to prepare a complete and accurate return,” Grzes said.
He admitted that he often files for an extension himself.
Am I more likely to face an IRS audit if I file an extension?
“There was this misnomer for many years that if you file an extension, you’ve got a higher probability of being audited,” Grzes said.
“And that was never true.”
Mistakes lead to IRS refund delays
Take extra time to review both the recovery rebate credit and the child tax credit to avoid potential mistakes that could lead to long delays of your refund.
The IRS has mailed more than 250 million letters to help taxpayers match their IRS records for both the third stimulus payment issued last year and the monthly payments issued for the advance child tax credit, according to testimony made by IRS Commissioner Charles Rettig before the Senate Finance Committee on April 7.
Letter 6475 refers to the stimulus money paid out last year from March through December. Some people saw the money all at once; others saw some “plus up” payments.
Letter 6419 refers to up to six monthly payments received in 2021 as an advance payment for the child tax credit. Those payments were made from July through December, often around the 15th of the month.
Rettig noted that taxpayers also can verify these amounts by accessing their online account through IRS.gov.
You also want to review your bank statements and financial records to double-check the payments received.
Last year, major headaches occurred when more than 10 million federal income tax returns for 2020 reported numbers that didn’t match IRS records for two Economic Impact Payments received in 2020. Each of these returns, the IRS said, then “required a manual review and resolution by an IRS employee.”
“It is critical that individuals and their preparers verify the possibly six to eight payments received in 2021 before submission of a 2021 return this year,” Rettig said in testimony.
Do I have to file by April 15?
Taxpayers have a few days beyond the traditional April 15 deadline.
The deadline for filing 2021 federal income tax returns or an extension to file falls on April 18, instead of April 15, because of the Emancipation Day holiday in the District of Columbia.
(And taxpayers in Maine or Massachusetts have until April 19 to file their returns due to the Patriots’ Day holiday in those states.)
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No, you don’t have until May or July
The upheaval at the IRS relating to the pandemic and other issues led to extensions of the deadline in the past two years.
There are no such extensions this year.
Easy last-minute tax break
Most people – nearly nine out of 10 – claim the standard deduction and don’t itemize. So it could be easy to overlook one simple tax break, especially if you’re in a rush.
A special but temporary tax break exists if you donated money in 2021 to a qualified charity but are taking the standard deduction.
The donation must have been made by check, credit card, or debit card by Dec. 31, 2021. The IRS notes that “cash contributions don’t include the value of volunteer services, securities, household items or other property.”
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A married couple taking the standard deduction is allowed to claim up to $600 for cash contributions made to qualifying charities in 2021 if filing a joint return.
A single individual, including married individuals filing separate returns, can claim a deduction of up to $300 for cash contributions.
See Line 12b on the front of the 1040 for 2021 for “Charitable contributions if you take the standard deduction (see instructions).”
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“Since the Tax Cuts and Jobs Act passed at the end of 2017, they increased the standard deduction substantially so there are more and more people who don’t even itemize,” said Grzes, with the American Institute of CPAs.
Many taxpayers could wrongly think that they can’t claim any deduction for charitable contributions if they don’t itemize. But this temporary break for up to $300 or up to $600 in cash donations is available on the 2021 return.
A married couple filing jointly, he said, could save anywhere from $60 to $222 in federal taxes if they made the maximum $600 contribution in 2021. The exact amount will vary based on your tax rate.
Single filers would save somewhere between $30 to $111, depending on their federal tax rate.