After a delay amid the COVID-19 pandemic and the subsequent economic downturn, this year's deadline for filing individual income tax returns is now looming. But there continues to be confusion about what exactly is required on July 15 in light of the change and the ongoing coronavirus crisis. To help sort through it all, we asked CPAs and other financial professionals across the country what taxpayers need to know to be fully prepared for Tax Day 2020.
It's still possible to file an extension.
Even with the three-month deadline extension, some taxpayers still aren't prepared to submit their completed tax returns by July 15. No judgment here. Just be sure to alert the IRS in writing. "You can extend the deadline for filing from July 15, 2020, to Oct. 15, 2020, by filing Form 4868 by July 15," says Tim Yoder, the tax and accounting analyst for Fit Small Business. Otherwise you'll be charged a failure-to-file penalty of 5% per month on taxes owed.
There is a penalty for not paying by July 15, even if you get an extension.
While it's possible to request yet another deadline extension for the submission of completed tax forms, keep in mind that there will be a penalty if you do not pay any projected money owed by July 15, Yoder says. "The extension gives you extra time to file the return, but you must still pay any anticipated income tax due." If you don't, you'll be charged 0.5% per month, with a maximum penalty of 25%. (The penalty will start accruing on July 15, not on the original due date of April 15.)
There's no penalty or interest for those who do pay by July 15.
Just to be clear on this important point: The delayed deadline is for payment as well as filing. If you had already completed your tax return paperwork before the IRS announced the filing deadline extension but had not yet paid money owed, there is no penalty for waiting until July 15 to make the payment. Normally there is no such extension, says Christian Brim, a CPA with Core, a company that helps small businesses lower their taxes. But this year, "no penalty or interest will be assessed if payment is made by July 15."
Americans living abroad must file at the same time as everyone else.
For Americans living abroad, the deadline change had a slightly different implication, says David McKeegan, co-founder of Greenback Expat Tax Services. Typically, Americans abroad get an automatic two-month extension on tax filing without having to lift a finger: Their tax returns are due on June 15 rather than April 15. This year, however, unless expats specifically request an extension, their tax returns will be due at the same time as all other Americans', on July 15.
First- and second-quarter estimated income tax payments also are due.
Individuals who have income not subject to withholding — such as dividends, interest, and self-employment income — often are required to make four quarterly estimated income tax payments during the course of the year. The first-quarter payment for 2020 was originally due on April 15 and the second quarterly payment was due on June 15. But with the extension for filing, both of these payment deadlines were also extended to July 15, Yoder says. In other words, taxpayers now owe both quarterly payments at once.
There are penalties for late and inadequate quarterly payments.
For those who fail to make adequate first- and second-quarter 2020 estimated tax payments by July 15, an underpayment penalty will start accruing on July 15, Yoder says. "The underpayment penalty varies by quarter but recently has been 5 to 6%."
There are options if you can't pay.
With the COVID-19 crisis affecting millions of Americans, more people than ever will be struggling with tax debt this year, says Arnold van Dyk, director of tax services for TaxAudit. "For those who are unable to pay their tax bill by the July 15 deadline, there are a few options to explore." Most taxpayers, he says, will qualify for an IRS installment agreement, which allows for paying taxes owed over an extended time frame. Additionally, certain taxpayers may be eligible to settle their tax debt for less than the amount owed through the IRS' Offers in Compromise program. "We recommend taxpayers seek the advice of a tax professional to ensure they understand their options and determine the one that best fits their tax situation," van Dyk says.
It's best to prioritize 2019 taxes due over 2020 estimated taxes.
If you're short on cash, as many Americans are amid the current economic downturn, Yoder, of FitSmallBusiness suggests paying your 2019 tax balance due before worrying about your 2020 estimated taxes. That's because failing to pay your 2019 taxes owed results in a penalty of 0.5% per month plus interest, he says, while failure to pay your 2020 estimated taxes results in a 5% to 6% penalty per year, with no additional interest.
There's still time to reduce your 2019 tax burden.
While the looming tax deadline is enough to make the best of us grumpy, there is one small silver lining: This year's deadline extension means you also have more time to reduce your 2019 tax burden by contributing to an IRA. "Any IRA contribution made by July 15 can be applied toward your 2019 maximum contribution and potentially be deducted on your 2019 return," Yoder says. "Be sure to indicate to your IRA custodian that you intend the payment to be for 2019."
Related: 31 Tax Credits and Deductions That Could Save You Thousands
File quickly and electronically to expedite a refund.
If you're among those expecting a refund this year, file as soon as possible and be sure to file electronically with the request for direct deposit. "This gives you the best chance to receive your refund sooner," says Jim Torgerson, owner of Torgerson Financial Group in Palatine, Illinois. "The reason being, as of this writing, the IRS is not yet processing paper returns."
The deadline extension is no excuse to procrastinate.
This should probably go without saying, but the July 15 tax deadline is no reason to put off all things regarding taxes until the last minute. "The sooner you file, the better," Torgerson says. "The longer one waits to gather all the tax data, the more that can be overlooked."
Related: Too Busy to File a Tax Return? 12 Tips for Procrastinators