With the tax deadline right around the corner, millions of Americans are scrambling to get their returns done on time. If you're one of them, here are three pieces of advice from our tax experts that can help the process go a little smoother for you.
One last-minute tax tip you need to know is what you have to do if you can't get your taxes in by April 15.
First, if you need more time, you must file for an extension by April 15. This gives you another six months to get all of your paperwork in. It's critical that you get your extension filed by April 15, as the tax penalty for not filing either your taxes or an extension by April 15 can be huge if you owe taxes. If you're expecting a refund, then there is no penalty. This is because you are essentially giving the government an interest-free loan, and they would like to keep your money as long as possible. The tax penalty for not filing is 5% of your unpaid taxes per month, though it's capped at 25%. That said, if you owe $2,000 in taxes and wait two months to file your taxes or an extension, you will then owe a $200 penalty just for filing late.
Second, even if you're granted an extension and given until Oct. 15 to file your taxes, you still must pay what you think you will owe by April 15th. The failure-to-pay penalty is 0.5% of the taxes due for every month you are late, as well as the regular 3% annual interest rate for tax underpayments. Using our example above, if you owe $2,000 in taxes and you get an extension but wait two months to pay your taxes, you'll still owe $20 in penalties for paying late, as well as $10 in interest.
One thing procrastinators need to understand is that they should double-check with their broker about the April 15 deadline for making last-minute IRA contributions. These contributions are popular because they're one of the few ways you can still reduce your tax liability for the 2014 tax year, but you have to be smart about meeting IRS guidelines and following your broker's limitations.
Technically, the IRS mailing rules allow you to mail your IRA contribution by April 15, and even if your broker doesn't receive it until after that date, the postmark date makes it eligible. However, be sure to follow up with your broker and make sure the contribution gets coded correctly to the 2014 year, as many companies will assume a late contribution should automatically go into your 2015 tax year.
Similarly, check with your broker to see how they handle online IRA account openings and contributions. If it takes a day or two for payments to clear, the safest choice might be to get your account started a few days before April 15 just to give more time for the dust to settle. The risk of an audit is slight, but carefully following protocol can save you headaches later.
If you've prepared your return with the intention of getting in just before the April 15 deadline, but you find out you owe the IRS more than you had expected, you have several options.
First of all, the IRS takes credit cards through certain third-party payment processors. So, if you don't have the money to pay your taxes now, but you will shortly, this could be a great option for you. You'll end up paying a processing fee of about 2% of the amount you charge to your credit card, but that's still better than getting hit with interest and late-payment penalties by the IRS. Plus, there are lots of cards out there that offer 0% introductory interest rates for periods of up to 21 months.
Another option is to set up a payment plan with the IRS. You'll have to pay interest on your unpaid balance, but the IRS' interest rate is relatively low (currently 3%), and you can take your time paying your tax debt. You can set up an installment plan for up to 72 months, which can turn a seemingly crushing tax burden into manageable monthly payments.
Remember, as my colleague Dan Dzombak said, that filing a tax extension does not allow you to pay later, but simply extends the amount of time you have to file your return. You'll still have to pay any outstanding tax balance by April 15, or face interest and penalties.