COVID-19 has been wreaking havoc on the U.S. economy since cases started multiplying in March. At a time when so many people are struggling, you can't afford to fall victim to tax blunders that cost you money or make your financial circumstances harder to bear. Here are three big mistakes to avoid right about now.
1. Not filing your tax return on time
Because of the COVID-19 crisis, Americans have been given an extra three months to get their 2019 taxes done. Normally, returns must be submitted by April 15 unless that date falls on a weekend or coincides with a holiday. This year, filers get an extra three months due to the pandemic, moving the deadline to July 15.
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But don't be late with your taxes. Filing a return might not be on your radar this summer, especially if you're grappling with income insecurity, work issues, or the struggle to entertain a houseful of children in the absence of camp. But if you owe money on your 2019 taxes and you file your return late, you'll face two costly penalties.
First, you'll be hit with the failure-to-file penalty, which will cost you 5% of your unpaid tax bill for each month or partial month your return is late. You'll also face a late-payment penalty equal to 0.5% of your unpaid tax bill per month or partial month you don't pay it.
At a time like this, the last thing you need is an extra expense, so be sure to get your tax return in by July 15, and if that's really not possible, request an extension. Doing so won't give you more time to pay your tax bill, but you'll at least avoid the failure-to-file penalty, which helps.
2. Delaying your taxes if you're due a refund
Most people who file a tax return wind up getting a refund. If you typically get money back from the IRS and have no reason to think this year will be different, it pays to file your taxes as soon as you can -- even though you have until mid-July to get them done. The sooner you do, the more quickly your refund can be processed, and if you're having a hard time paying bills right now, that's important.
Another thing: Even if you're used to filing paper returns, be sure to submit your taxes electronically this year. Refunds for electronic returns are normally processed in half the time it takes to process those associated with paper returns, but also, back in April, the IRS said it's not processing paper returns due to the COVID-19 situation, which means your refund could be subject to a very lengthy delay if you go that route.
3. Withholding too much tax in your paychecks
The whole reason people get tax refunds or wind up owing money during tax season is because paying taxes during the year is, to some degree, a guessing game. Though the IRS issues withholding tables so employers know how much tax to deduct from earnings, other factors, like outside income, ultimately dictate what your tax bill looks like.
Still, if you're having a hard time making ends meet right now, and you typically get a tax refund, you might want to adjust your withholding for the current year so you get more money in your paychecks up front. And if you're worried that withholding less tax will result in a scenario in which you owe the IRS money come 2021, take the extra cash in your paychecks, put it in a savings account, and only dip in when you need that money for immediate, essential expenses. That way, if you do wind up with an underpayment, you'll potentially have some savings to dip into next year to cover whatever tax bill ensues.
At a time when the entire country is operating in crisis mode, you can't afford to fall victim to tax mistakes. Avoid the above blunders at all costs to reduce your stress during an already difficult time.
