April 18 is coming up. Have you filed your tax return yet?
In this week's episode of Industry Focus: Financials, analyst Gaby Lapera and personal finance guru Dan Caplinger share some of their best advice for tax filing. Listen in to find out why it's so important to file, why you might want to file an extension request and how to go about doing that, the ins and outs of IRA and health savings account deductions, the fastest way to get a refund back from the IRS, when to contact a tax professional, and more.
A full transcript follows the video.
This video was recorded on April 10, 2017.
Gaby Lapera: Hello, everyone! Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. You're listening to the Financials edition, taped today on Monday, April 10th, 2017. My name is Gaby Lapera, and joining me on Skype is Dan Caplinger, personal finance guru. Thanks for joining us, Dan! How's it going?
Dan Caplinger: I'm doing good, Gaby. Thanks for having me on!
Lapera: I'm happy to have you here because you're here to talk about a topic that ought to be on everyone's mind, which is taxes. Listeners, just in case you didn't know, pro tip, taxes are due on April 18th this year, which means if you haven't filed them yet you need to hop to it. In preparation for that, there are a couple of things that you can do to cut your tax bill. Not a lot, because you've left it until the last minute. But there's a few. The first and most widely relevant, probably, is contributing to your traditional IRA.
Caplinger: That's absolutely right, Gaby. That's something that, year in and year out, a lot of people end up being surprised at the fact that they can still make a contribution for the 2016 IRA and have it count on their taxes, even though they're making it during calendar year 2017. But the IRS gives you that break until the filing deadline, which this year is April 18th, because April 15th falls on a weekend. You have a little over a week to go ahead and get that money into that traditional IRA, and get to count it as a tax deduction if you use that traditional IRA account against your 2016 tax bills. Pretty much the best way and easiest way to get yourself a little bit of tax savings if you're trying to boost that refund up.
Lapera: Right. With a traditional IRA, as with a Roth IRA, but Roth IRAs don't come with tax breaks, the contribution limit for 2016 is $5,500 for people who are not at catch-up age which is, what, 50?
Caplinger: Yeah. If you're younger than 50, then $5,500 is the limit. 50 or older you get an extra $1,000, which brings the total up to $6,500.
Lapera: That's a nice little tax break if you need one. The other thing you can do if you have one is contribute to your health savings account.
Caplinger: That's right. Again, in order to qualify for that, a whole bunch of stuff has already have been in place for 2016 before that calendar year ended, specifically that you had a high-deductible health plan, that you met the requirements that would let you do a tax-deductible health savings account. If that's the case for you, then you have until the tax filing deadline to get that money into the health savings account and have it count as a 2016 deduction on your tax return.
Lapera: Quick question for you about the traditional IRA going back a little bit. Could someone, in theory, open one today, and then fully fund it and have it still count toward the 2016 tax deadline?
Caplinger: Yeah. For a traditional IRA, that's definitely the case. In fact, you'll see a lot of the brokerage companies are really pushing hard. It's going to be a busy week for them, because they have to get all that paperwork done quickly so their new clients will be able to take advantage of that. But, yes, that's something that, in many cases, you might decide in order to facilitate things to go physically to a financial institution and write a check and get that money in there, rather than doing things at a slower pace. But, yeah, your broker should be ready for you, if you are interested in getting that IRA done. They will have everything as efficient as possible to let that happen.
Lapera: Yeah. And if you need any extra information about what a traditional IRA is, or what's the difference between a traditional and Roth IRA, I totally have so many articles that can help you out. Just shoot me an email at firstname.lastname@example.org. Let's get to the stuff that you can't do to cut your tax bill. Sadly, you can't do any capital gains stuff, can't contribute to 401(k)s, charitable gifts. It's too late. Too bad, so sad. Try to get your taxes done earlier next year, and try to engage in behaviors that reduce your tax liability throughout the year, instead of waiting until the last minute.
Caplinger: Doesn't mean you shouldn't do those things for 2017. It's just not going to help you on what you're filing later this week.
Lapera: Exactly. So, as my mom always says, an ounce of preparation is worth a pound of worry. I think. [laughs] I clearly did not prepare very much to say that statement. Let's talk a little bit about why it's very important to file, or get an extension, rather than just blowing off the deadline on April 18th. Penalties, tell me about some penalties, Dan.
Caplinger: There's a lot of people who, at this point, are ready to throw their hands up and say, "You know what? I'm not in a position to deal with this. I'm not going to be able to pay my tax bill. Wouldn't it be a great idea to not file and hope the IRS isn't going to catch me?" That's a really bad idea. The biggest reason it's a bad idea is the IRS already knows that you're out there. Your employer filed a W-2 for you. If you have financial accounts, then the financial institutions have filed tax forms on you. They know you're out there. They know you should be filing a return, so if you don't, you're not going to slip under the radar. They're going to get you. And when they do get you, the penalties for not filing are extremely high. It's 5% of your tax bill on top of what you owe for every month or part of a month that you're late in filing.
If you don't file until April 22nd, let's say, that's part of a month. Because it's part of a month late, you're already 5% in the hole. Wait until late May and you're going to pay a 10% penalty. It keeps going up, all the way up to 25%. The reason I say this is it's really easy to avoid paying that penalty, because all you have to do is file for an automatic extension. Everyone has the right to get that extension. It gives you six months, until mid-October, to file your return, and it avoids all of those failing-to-file penalties that are so draconian.
Lapera: Interestingly, I was looking up the exact tax code before we started the show, and I found out that you technically don't have to pay any penalties for filing late if you are owed a refund, which blew my mind, but it kind of makes sense, because that's the government's way of holding on to your money as an interest-free loan to them for even longer. But this is a very bad strategy. Do not assume that you are owed a refund. Honestly, the only way you're going to know is once you've done your taxes. And then you've done all the tax prep anyway, and you should just file your taxes.
Caplinger: Like you said, in that case, you're only penalizing yourself. There's hundreds or even thousands of dollars that you might be owed in that refund, and you are the one, it's all on you, the reason you're not getting that money is because you haven't filed that return. Unfortunately, there are some people, they go years without filing, and they end up losing those refunds because they never bothered to file. That's just a sad thing, because it's their money that they should be getting back for them, that they voluntarily give up because they never file.
Lapera: Yeah, fun fact: After three years, unclaimed tax refunds are forfeited, and they become property of the U.S. Treasury. Don't let that happen to you.
Caplinger: It's your last chance on 2013 returns.
Lapera: [laughs] If you haven't filed your taxes since 2013, you should do that, and maybe see a lawyer. OK. We've talked a lot about extensions and why you should want one. What are some good reasons to file an extension?
Caplinger: There's a couple things. One just is, if you feel overwhelmed and you need more time to get all of your things together, then filing an extension can give you the time that you need in order to get everything done. To be clear, you still have to pay your tax bill on time. If you don't pay your taxes on time, even if you file the extension, that gives you more time to file the return. But it does not stop the clock on penalties for failing to pay your taxes on time. Those taxes are still due on April 18th.
So, what most people do is, if you think you're going to owe taxes, then you cut a check along with the extension request. That gets your tax bill paid, gives you time to calculate to actually do your tax returns, calculate the exact amount, and that gets you in the right ballpark so that even if you're off by a little bit, any penalties and interest that you might owe are relatively small.
But the other situation where it might make sense to ask for an extension is, if you have a particularly complicated tax return. For instance, I know some people who invest in what's called master limited partnerships, which are these specialized energy investments. They're really good for providing income, but they are notoriously late for getting you the tax information you need in order to complete your return. So, a lot of people, when they invest in master limited partnerships end up filing for extensions pretty much every year, because they need that time just for the actual partnership to get them the documents they need to prepare their returns correctly.
So, those are situations where you might especially be likely to need an extension.
Lapera: That's a really good point, that you will still pay late penalties on the taxes if you don't at least send in what you imagine you probably owe. If you send in too much, you'll get it back in the refund next year. But, one of the other things to think about with the extension is (a) the extension gives you a six-month extension, so your return is due on October 16th, 2017. Once you file the extension, if you file for an extension on time, you have until October 16th to get your return in. The other thing to think about with extensions is it's too late. It doesn't give you an extra six months to get tax breaks. That deadline is still April 18th. The other thing I was going to ask you was, is there a date by which you must file for an extension?
Caplinger: You need to file the extension by the original due date, by the April 18th due date. There's actually good guidance on the IRS website that can help you get that extension filed. Technically, the rule is, the same way you have to have a 1040 postmarked on the tax filing deadline, you have to have your extension request done that way as well. There's actually some pretty good tools for filing an extension request electronically. You can usually do that for free, even if you wouldn't otherwise qualify for free filing services through the IRS. But if you take a look at the IRS's free file web page, that will give you some guidance on services that will help you file that extension request electronically, get you that six months that you need.
Lapera: And just in case you want to look this up on your own, you're going to want to look for Form 4868, which is the extension request form. So, let's talk about something that everyone does like, which is refunds. Refunds are really interesting, because ideally what you do is pay the government the exact amount of money that you owe them and they don't give you a refund and you don't owe any money, because that way, you haven't lent any money to the government tax-free. But, still, sometimes you overpay. This year, I actually only owed the federal government $30, and I was very impressed with myself. I was like, "I'm an impressive person, I can't believe I figured out my tax liability so perfectly that I only owed them $30."
Caplinger: That's nicely done. That's one of the smallest amounts I've ever seen.
Lapera: Thank you very much. I really appreciate that. [laughs] It means a lot, coming from you. But, refunds. When should people expect to get them?
Caplinger: How quickly you get your refund depends a lot on how you file your returns and how you ask to get your refund back. There's two things you can do here. Rule No. 1 is, electronic filing is a lot faster getting your refund back than if you actually mail in a paper return. You can tell just how much the IRS really pushes this by taking a look at how quickly you can get information on a refund. If you file electronically, the IRS, there's usually a way to give you at least a ballpark estimate of when you can expect your refund, just 24 hours after you file.
But if you file a paper return, they don't even want to talk to you until four weeks after you file the return. They don't even want to give you an idea of when you would get that refund back. So, filing electronically, if you're expecting a refund, it's really a no-brainer to get that done.
The other side of the equation is how you get that money back. On your tax return, there's a spot that you can arrange to have your refund direct deposited into your bank account. That is always quite a bit faster than having the Treasury have to cut you a physical check and then mail it to you through the mail. As soon as that return gets processed by the IRS, the direct deposit scenario gets things moving a lot faster. You can end up getting your refund a week or two weeks sooner through a direct deposit than you would if you were getting a paper check from the IRS.
Lapera: Not just that, but it's also more secure. A check is not going to get lost in the mail if it's going via direct deposit. It can't be intercepted, if you're worried about identity theft in some way, shape, or form, if it's going directly into your bank account.
Lapera: So, just things to think about. I know that the IRS offers a service to check where the refund is. Do you know where to access that?
Caplinger: Yeah, there's a couple of things that you can do. On the IRS website, there's a tool, it's called Where's My Refund. Basically, what you do there is you enter in some personal information to prove that it's you. You're going to want to have a copy of the tax return that you filed so that you know the amount of the refund that you're expecting to get. Then, when you enter all that information in, the IRS will then tell you, they'll give you a sense of where your return is in the process, and give you an anticipated date on when you can expect to get that refund back. The other thing, even if you don't have internet access, an alternative is to call up the IRS. They actually have a refund hotline that they let you call and find out. It's the same general idea, give you a sense of when that refund is coming back to you.
Lapera: Awesome. I think that covers everything that I wanted to cover today. Do you have any other advice on filing your taxes that you would like to give to our listeners?
Caplinger: If you're uncomfortable with how late you have left your filing this year, then don't forget about that pain when next year comes around. Use that as a little bit of extra incentive to get started a little bit earlier and avoid putting yourself in this bind. I know you can say that year in and year out. It's the same thing with Christmas shopping for me. You still can get yourself in that bind, but keep it in mind. At the very least, if you need some extra time, go ahead and file that extension. Get yourself the time that you need.
Lapera: I have one, too, which is file online using tax preparation software if your return is easy enough that that is an option for you. It shortens the amount of time you have to spend on taxes, and it helps lessen the likelihood of an audit. Plus, it's kind of fun. I don't know if you're one of those people, but I love filling out questionnaires. I love filling in the bubbles and doing the Cosmo quiz and seeing what kind of season I am at the end of it. Same thing with doing your taxes. It's kind of fun. It's just someone asking you questions.
Caplinger: I think you and I are the only two people on the planet who would agree with that statement. Maybe some listeners will chime in and say they're in the same boat.
Lapera: Yeah. Thank you so much for joining us, Dan. And thank you for putting up with my kind of scratchy voice. Listeners, it's allergy season here in D.C., and I'm going to sound miserable for the next month. I'm actually fine. Thank you for joining us. As usual, people on the program may have interests in the stocks they talk about, and The Motley Fool may have recommendations for or against, so don't buy or sell stocks based solely on what you hear. Contact us at email@example.com or by tweeting us @MFIndustryFocus, and let us know what you'd like to hear about next. Please keep in mind that I cannot give you personal tax advice, so if you have any questions, go to somebody who can help you with that, like a tax preparer. Thank you to Austin Morgan. Austin, have you filed your taxes yet?
Austin Morgan: I have.
Lapera: Oh, good for you! Austin is today's totally rad producer, and a young person totally on top of his taxes. Thank you to everyone else for joining us, and I hope everyone else has a great week. Don't forget to file your taxes!