With the tax deadline rapidly approaching, millions of Americans are scrambling to get their tax returns (or extensions) in by April 18. As you prepare your return, here are three important tax rules to keep in mind. In fact, even if you've already filed, these three rules are so important that you should know and use them every year, for as long as they're the law of the land.
1. A tax extension doesn't delay the payment due date
Since the tax deadline is rapidly approaching, this one is especially important to know now. According to the IRS, more than 10 million people file a tax extension every year, so if you're planning to file an extension, you're certainly not alone. However, before you file yours, it's important to clarify what an extension is and what it isn't.
When you file a tax extension, the IRS automatically gives you an additional six months to file your tax return. For the 2016 tax year (the return you file in 2017), this means that the filing deadline is extended until October 16, 2017.
On the other hand, tax extension does not extend the time you have to pay any balance due to the IRS. Any tax you're required to pay to the IRS must be paid by April 18, or you'll be charged interest and penalties. The current IRS interest rate is 4% per year, and the penalty for paying late is 0.5% for every month or part of a month the tax remains unpaid, up to a maximum of 25%. So, if you don't file your return until October and wait until that time to pay your taxes, you'll find that the amount due has increased significantly.
2. You can take certain deductions even if you don't itemize
It's fairly common knowledge that you have the choice between taking the standard deduction and itemizing your deductions when you complete your tax return. About 70% of Americans choose the standard deductions, determining that the automatic $6,300 (single) or $12,600 (married filing jointly) deduction is the better deal than computing deductions the long way.
However, many people don't know that there are certain deductions, known as "above-the-line" deductions or adjustments to income, that all taxpayers can take advantage of, regardless of whether they itemize or take the standard deduction.
Among these deductions are the deductions for student loan interest, traditional IRA contributions, job-related moving expenses, and educator classroom expenses. Many people aren't aware that some of these deductions even exist -- in fact, I recently wrote an article about how one-fourth of student loan borrowers didn't know their interest is deductible. And many know they exist but don't think they can take advantage of them because they don't itemize. Here's a more thorough guide to the available above-the-line deductions, so you can be sure not to miss any of them.
3. You can make tax-deductible IRA contributions months after the end of the year
Speaking of above-the-line deductions, the deduction for traditional IRA contributions is one that all taxpayers should know, if they don't already.
For the 2016 and 2017 tax year, most Americans can deduct up to $5,500 in traditional IRA contributions, and are allowed an additional $1,000 as a catch-up contribution if they're 50 or older. If you're in the 25% tax bracket, this translates to a $1,375 or $1,625 tax deduction every year. Not to mention that your money will then be free to grow and compound on a tax-deferred basis until you retire. Here's a quick guide to help you decide which type of IRA is best for you, if you don't already have one.
One of the best features of the traditional IRA deduction is that it's one of the few tax breaks you can still take advantage of after the tax year ends. In fact, you have until the April 18 tax deadline to make your contributions for 2016 -- so you can still take advantage of this now, even though 2016 ended more than three months ago.