Although the IRS ended up delaying the start of this year's tax season, the agency initially held firm on its standard April 15 deadline. But then the $1.9 trillion American Rescue Plan was signed into law in mid-March, and it included some provisions with the potential to impact 2020 taxes. As such, the IRS made the decision to postpone this year's tax-filing deadline from April 15 to May 17, giving filers an extra month to get their returns taken care of.
At this point, that mid-May deadline is looming, and if you haven't started your 2020 taxes yet, you may be growing increasingly stressed by the minute. Thankfully, you have options if you can't get your taxes done by May 17 -- namely, you can request an extension and buy yourself six extra months from the original filing deadline to complete your return. In other words, if you ask for an extension, you'll have until mid-October to get the job done. But while that may seem like a good solution, here's one hiccup you might encounter.
Image source: Getty Images.
Your money is still due
While a tax extension will give you more time to file your actual return, it won't give you more time to pay the IRS if you owe money from 2020. In fact, if you don't satisfy your tax debt in full by May 17, you'll be charged a late payment penalty equal to 0.5% of your unpaid taxes for each month or partial month you're overdue, up to a total of 25%.
Now here's one thing a tax extension will do -- it will help you avoid the dreaded failure-to-file penalty. That penalty applies when you're late with your tax return but you also owe the IRS money, and it equals 5% of your unpaid tax bill for each month or partial month your return is late, up to 25%.
As you can see, the failure-to-file penalty is much more severe, on a monthly basis, than the late payment penalty, so if you really can't complete your taxes by May 17 and you think you owe money, getting that extension request in could spare you a world of financial hurt. But if that's the case, you should also do your best to estimate what you owe the IRS and pay it by May 17 so you don't continue to rack up penalties and interest charges.
If your 2020 income largely stayed the same as it was in 2019 and you didn't owe money for that tax year, then you may not need to pay the IRS anything this year. On the other hand, if you made extra money in 2020 by selling stocks at a profit or took in another type of side income, and you never paid any estimated taxes on your capital gains or earnings, then you could have a tax liability lingering from 2020 -- in which case you should try to pay the IRS something by May 17.
To request a tax extension, all you need to do is submit Form 4868 by May 17. You don't need an actual reason to get more time. What you do need to do, however, is recognize that while a tax extension may get you out of a failure-to-file penalty, it may not be a one-stop solution if you owe money from 2020.
