The deadline to file your 2020 taxes has been pushed back one month to May 17, 2021, to help people struggling because of the pandemic to finish tax preparations. But you may need even more extra time. If you think you’ll need more time to get your taxes done, filing a tax extension is a must. When you file a tax extension form, the IRS gives you an additional six months to get your return in. A financial advisor could help you create a tax plan to meet important deadlines and reach financial goals. Let’s break down what you need to know about getting a tax extension.
Check out our federal income tax calculator.
How to File a Tax Extension
If you need to file an extension on your taxes, you’ll need to file IRS Form 4868 (Application for Automatic Extension of Time To File U.S. Individual Income Tax Return). The deadline to file your 2020 taxes is May 17, 2021. As with your 1040 form, you can file a paper form or do it online. You can use Free File through the IRS website to file the form. You can also use one of the many tax prep software programs to file the extension.
However, it’s not a simple matter of just filing a form.
Filing an Extension Doesn’t Mean You Don’t Have to Pay
Getting a tax extensions means you have more time to file your tax return. But it does not give you an indefinite amount of time to settle up on your outstanding tax bill. If you owe money to Uncle Sam, you’re still expected to pay up by the May 17, 2021, filing deadline. If you don’t pay, penalties and interest start accruing on the money on the day after tax day.
As long as you file an extension, you can avoid the failure-to-file penalty but there’s a separate penalty for not paying an outstanding balance. The failure-to-pay penalty is 0.5% of your total taxes due for every month you still owe. The penalty eventually maxes out at 25% of your unpaid tax balance. If you owe a lot to the government, that can really add up.
On top of that, you’ll be charged interest, which is the federal short-term rate (currently around 2.5%), plus 3%. If you owe $5,000 and you wait until October to pay, you’re looking at close to $300 in penalties and interest. If October comes and goes and you still don’t file or pay, the 5% failure-to-file penalty kicks in, which would mean you’d owe even more.
You’ll Have to File a Separate Extension for State Taxes
Extensions granted by the IRS only apply to your federal taxes. You’ll also need to request one from your state’s revenue office. The rules regarding the extension deadlines, penalties and interest vary from state to state. Check the website of your state’d department of revenue to see how long you have to file and what it’s going to cost you if you don’t pay right away.
An Extension Isn’t Required If You’re Owed a Refund
Technically, if you’re expecting to get money back on your taxes, you’re not required to file a return or get an extension. After all, the IRS can’t charge you penalties if there’s nothing owed. But if you’re wrong, and you do indeed owe money, then all of the above fines will apply.
And of course, there’s no good reason to put off filing your return if you know there’s a refund coming your way. If you get a refund, it means you’ve been overpaying your taxes and effectively giving the IRS an interest-free loan. The least you can do is collect your refund on time.
And if you’re really late in filing, you might not get your refund at all. You can’t wait forever to get your return in: You have three years from the annual filing deadline to claim your refund. If you put it off too long, the tax man gets to keep that money.
Related Article: What You Should Know About Tax Refunds
There Are Options If You Can’t Afford to Pay
It’s always good to pay as much as you can by the tax deadline, even when you’ve filed for an extension. But if you owe a substantial amount in taxes, that may not be realistic. Fortunately, the IRS does offer help to struggling taxpayers who want to make good on their obligations but can’t come up with the cash all at once.
As long as you owe less than $50,000 in taxes, penalties and interest, you can request an Installment Agreement through the IRS website. You can break the debt down into monthly payments and take to 6 years to pay it off. You’ll have to sign up for automatic bank drafts when you apply but you may be able to get some of the penalties reduced or waived altogether as long as you don’t fall behind.
Related Article: What to Do If You Can’t Pay Your Tax Bill
If you owe taxes at the state level, you should be able to set up a separate installment agreement for that. Generally, you’ll have a much shorter time frame to get the debt paid off and you may be required to make a balloon payment up front to qualify.
Tips for Maximizing Your Tax Savings
- A financial advisor could help you maximize your tax savings to set and reach investing and retirement goals. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors, get started now.
- If you find that you’re regularly receiving large tax refunds, this may mean that you’re paying too much in taxes in the first place. In that case, you may want to adjust the withholding amounts on your W-4 so you can keep more money throughout the course of the year. Big refunds are exciting, but why give the IRS a free loan?
- Take advantage of SmartAsset’s free resources during tax season. Check out our income tax calculator today and get started!
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