Tax season can be a daunting period for many Americans. With complex regulations and tight deadlines, it often leaves taxpayers scrambling to meet their obligations, especially given the looming October 15 deadline for those who requested an extension. As nearly 19 million taxpayers filed for extensions earlier this year, it’s crucial to understand the implications of this decision, including new filing deadlines, potential penalties, and the options available for those who may struggle to pay their taxes.
If you are among the millions who opted for an extension in April, you are not alone. However, the deadline is quickly approaching, and knowing your exact deadline is vital. While most taxpayers have until October 15 to submit their 2023 federal income tax return, those residing in federally-declared disaster areas are granted additional time. In some cases, these extensions can extend deadlines until as late as May 1, 2025. This provision underscores the IRS’s effort to provide relief due to natural disasters that impacted individuals only after the original tax deadline. Checking the IRS database is recommended for those unsure of their eligibility for an automatic federal extension.
Although extensions can offer relief for filing, it is noteworthy that they do not extend the deadline for payment. The IRS enforces stringent penalties for those who fail to file their tax returns or pay their taxes on time. For individuals who submitted an extension but do not file by the deadline, the late filing penalty constitutes 5% of any unpaid taxes for each month or partial month, with a maximum of 25%. Conversely, the late payment penalty is calculated at 0.5% of the unpaid balance per month, capping at the same 25%.
For taxpayers who find themselves with an unpaid balance but still owe little or nothing, there is a silver lining—no penalties will be incurred if a refund is due. Awareness of these penalties is essential, as they can quickly accumulate and lead to substantial financial burdens. This highlights the importance of estimating tax liabilities as early as possible, making payments, and filing returns on time.
A proactive approach can significantly mitigate penalties. Tax professionals suggest estimating what you may owe in taxes and making preemptive payments before the April deadline and throughout the year. According to CPA Miklos Ringbauer, this strategy can help minimize both the failure-to-file and underpayment penalties. Taxpayers who take such measures can alleviate their tax liabilities significantly by mitigating penalties through timely filings and payments.
In the unfortunate event of owing more than initially anticipated, the IRS recommends an installment payment plan. This pathway allows taxpayers to divide their payments either within 180 days for those with liabilities of $100,000 or less, or through an extended monthly payment arrangement for balances under $50,000. It’s critical to bear in mind that while the penalties may decrease during an installment agreement, interest will still accrue on outstanding balances.
As the 2023 tax year winds down, taxpayers should not lose sight of their future tax liabilities. The 2017 Tax Cuts and Jobs Act is set to expire at the end of 2025, opening discussions about potential tax rate increases. Tax experts like Jim Buffington suggest now is the time to strategize, perhaps by considering capital gains acceleration or income shifting strategies. Preparation can prevent unexpected tax bills down the line, so exploring adjustments in withholding or making estimated tax payments will serve you well.
Understanding the intricacies of tax extensions not only involves knowing your new filing deadlines but also comprehending the penalties that can arise from both late filing and late payment. Being proactive, whether through payment plans or strategic planning, will provide taxpayers with more control over their financial health as they navigate the complexities of the U.S. tax system.
Leave a Reply