Everything You Need To Know About Taxes Leading Up to the Extension Deadline
The federal income tax extension filing deadline is Oct. 15. Those filers who needed more time to complete their returns had to file Form 4868 with the IRS earlier in the year to request an extension to file until Oct. 15, said Linda O’Brien, a legal analyst with Wolters Kluwer Legal and Regulatory U.S. With that extended deadline just around the corner, here is what filers need to know and have ready when filing their return.
Time Is Running Out
Time is truly of the essence with this tax extension. “No more extensions are available if you do not file your 2020 tax return by October 15,” said Steven J. Weil, Ph.D., president and tax manager of RMS Accounting.
Additionally, though you may pay a tax professional to help you prepare your taxes, Weil cautions the responsibility to provide correct and up to date information is yours, “Each taxpayer is responsible for properly reporting and filing with the IRS.”
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There Are Some Exceptions
While Oct. 15 is the final date for most taxpayers, Nate Smith, director at CBIZ MHM’s National Tax Office, said, “there may be a later date that is available for members of the military and others serving in a combat zone, who typically have 180 days after they leave the combat zone to file returns and pay any taxes due.” Further extensions may also apply to taxpayers in federally declared disaster areas. “For example, victims of Hurricane Ida may have until a later date to file individual tax returns.” Details can be located on the IRS website under Tax Relief in Disaster Situations.
You’ll Still Need To Pay Any Taxes Due on Time
One important thing to know is that the extension only applies to the act of filing your taxes; it does not delay paying any taxes you owe the IRS, said Minesh Patel, CEO of The Patel Firm.
Penalties and Fees Will Apply If You Are Late
If you owe money for your 2020 taxes, and you do not file your return by Oct. 15, the IRS will assess a penalty for late filing of 5% of any unpaid tax per month, said Shelli Woodward, tax expert and financial controller at MerchantMaverick.com. The only way out of penalties, Woodward said, is, “You may be able to remove or reduce some penalties if you can show that you acted in good faith and have reasonable cause for why you were not able to meet your tax obligations.”
You Will Need Some Key Documents on Hand
In order to file for an extension, you need to have crucial financial documents that reflect income and expenses, including W-2s, 1099s, K1s and other forms. “Depending on their personal situation, this could cover a long list of potential items and information,” said Rob Cordasco, CPA and founder of Cordasco & Company, P.C. “Someone who is self-employed will have different items needed as opposed to someone who is employed by an institution.”
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In addition to obvious forms of income, taxpayers should be prepared to report gambling winnings, Social Security income, unemployment income and stimulus payments.
Of course, you also have the ability to deduct some expenses from your taxes and should be prepared with records. Deductions, Cordasco said, “are any amounts you are able to claim to potentially reduce your taxable income.” Self-employed people can write off more deductions than others. But there are also deductions for such things as retirement contributions, military reserve expenses, health savings account contributions, and so on. “Since income tax is very broad and complicated, it is important to engage a qualified tax preparer who can assist you through the document gathering and filing for your specific situation,” he said.
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Don’t Forget About Stimulus Payments
If you received stimulus money from the federal government, Luis Rivero, CPA and director of tax at Taxfyle said, “This could affect how much you owe in taxes or the amount included in your refund. Additionally, If the IRS owes you money from the first two stimulus checks — this could be because either you may not have received the check or you could potentially have qualified for more — you can claim the missing payments through a recovery rebate credit on your 2020 tax form. The IRS says it will automatically evaluate your eligibility for the third stimulus check when your 2020 return is processed.”
You Must Pay Taxes on Cryptocurrency
While cryptocurrencies may seem like a mythical form of money to many of us, they are very real to the IRS. Rivero said you will need to report any cryptocurrency investment of more than $10,000. “There are things to remember when reporting cryptocurrencies on your tax return. If you traded a cryptocurrency for another, then the gain on the value of the first currency will be taxed. You’re taxed on your net gains. Net gains are your gains minus your losses for the year. Therefore, you should report all losses to reduce your taxes. Lastly, if you get a 1099-K from any US exchange, your tax return needs to account for all the trades you did during the year.”
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Unemployment Income Is Taxable
If you earned unemployment income of more than $10,200 ($20,400 for married couples filing jointly), you will need to report that income. However, Rivero said, “The tax break is for those who earned less than $150,000 in adjusted gross income and for unemployment insurance received during 2020.”
You Can File By Paper or Electronically
You have the option of filing online through the IRS website or a paper return. The electronic return will be much faster, O’Brien said, and if you’re owed a refund, expedites the chance of receiving your refund sooner. If you file by mail, be sure to include appropriate postage, and that it is postmarked by Oct. 15.
So long as you’ve kept good records and work with a tax professional, filing your taxes by this deadline should be relatively smooth.
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Last updated: Oct. 5, 2021