Back in March, the coronavirus pandemic prompted the Treasury Department and the IRS to push back the federal tax deadline for this year from April 15 to July 15, giving Americans an extra three months to file and pay their federal income taxes.
Now that the extended deadline is fast approaching, you may be among the many Americans who still need to file a return. During the 2020 tax year, the IRS expects to receive approximately 155.1 million individual income tax returns, according to Treasury Department data. But as of May 29, the IRS had received just over 133.8 million of them.
If you haven't gotten around to doing your taxes, that's understandable. But make sure to meet the new deadline, if at all possible, since IRS penalties for late payments and late tax filings still apply, even amid a global pandemic. And scrambling to file your taxes at the last minute can be stressful.
With just over a month to go, here's what you need to know about filing your taxes by July 15 and what to do if you need an extension.
Typically, freelancers pay estimated quarterly taxes in April, June, September, and January. But this year, as part of the broader deadline extension, the estimated tax payments that would have been due on April 15 and June 15 are now both due July 15, 2020.
Hopefully, you've set aside a little from each paycheck for taxes. Failure to pay quarterly estimated taxes could mean paying a penalty to the IRS for underpayment.
"I think a lot of people are extending [quarterly payments], and they haven't been good about budgeting, and they're going to learn the hard way. The IRS isn't very forgiving," says Mike Kojonen, the founder and owner of Principal Preservation Services LLC in Woodbury, Minnesota.
You can use this IRS tax withholding estimator to figure out how much you may need to pay. The best course of action, says Kojonen, is to budget for taxes throughout the year. One expert sets aside 40% of every paycheck in an account called "Uncle Sam's Money" to cover taxes and retirement savings.
Video by David Fang
Not only will filing before the July 15 deadline help you avoid costly penalties and interest, but doing so can also giving you a much needed cash infusion sooner rather than later. In the week ending May 29, the IRS issued about 730,000 refunds for recent filers.
"A lot of W-2 employees are getting refunds," says Kojonen. "If the IRS is holding onto your money, they're not paying interest, so why not get your money back sooner, especially at a time when you could really use it?"
If you're struggling after a disruption in or loss of income, your refund could provide a financial cushion. The average refund was $2,770, as of May 29.
You're also less likely to become a victim of a fraudulent tax return scheme by filing earlier: "Over the last five years, it's really grown," says Kojonen. "The sooner you can file, the sooner you can prevent someone from filing in your name."
Thanks to the extended deadline, you still have time to make a so-called prior-year contribution to your IRA for 2019 of up to last year's limit of $6,000. Just be sure to tell your financial institution that you want the money to count for 2019 rather than 2020.
Depending on how much you earn and whether you have access to a workplace retirement plan, your contributions to a traditional IRA may be tax deductible.
You also have more time to contribute to a health savings account, which is a savings vehicle that allows people enrolled in a high-deductible health plan to use pretax dollars to pay for medical care. Your HSA contributions are either pretax or tax-deductible and will reduce your taxable income for the year.
Video by David Fang
If you need to buy yourself more time, you can file for an extension that gives you until October 15 to wrap up your return. You can file for an extension by mail or online via one of the IRS e-filing options.
Remember that this extension only gives you extra time to file your taxes, not extra time to pay them. You'll need to pay your taxes, or an estimate of what you owe, by July 15.
While you're working on federal taxes, don't forget to look into your state return. Most states have given taxpayers more time to file but not all of them have. The AICPA maintains a list of states and their deadlines here. You can typically also file for an extension to complete your state return.
The longer you wait to file, the longer you'll delay getting that potential tax refund. That's money you can use to pay down your debt, invest in your 401(k) at work, map out your personal money goals with a financial planner, or put money aside for a rainy day.
"Right now, if you're able to put a little money aside, the most important thing you can do is build an emergency fund if you don't already have one," says Kojonen. The pandemic "has taught us the importance of fattening up your bank account just in case of emergency, because this was totally unexpected."
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