People scrambling to complete their taxes in April may have filed for a tax extension. This gave them a six-month buffer to get their forms in order. However, that six months will expire on Oct. 15, and the clock is ticking to turn in 2016 tax returns.
“The general problem is if you owe the government money,” says Ben Barzideh, wealth advisor at Piershale Financial Group in Crystal Lake, Illinois. “If you do owe money, that was owed on April 15.” Interest has been accruing on unpaid taxes since then. However, there will be additional penalties if a tardy taxpayer misses filing by the extension deadline as well.
[See: 10 Tax Breaks for People Over 50.]
File by Monday or pay a penalty. While the extension technically ends on Oct. 15, that day is a Sunday this year. As a result, taxpayers have until Monday, Oct. 16, to submit their forms. “This is the drop-dead deadline,” says Mitchell Baldridge, owner of Baldridge CPA in Houston. “If you miss the deadline on Monday, you’ll be subject to a late filing fee.”
The late filing fee tacks on a 5 percent penalty to unpaid taxes for every month the return is late, up to 25 percent. Taxpayers who wait 60 days will pay a minimum penalty equal to $205 or 100 percent of their unpaid taxes, whichever is less.
“I can’t emphasize enough that people file by Monday, even if they aren’t able to pay,” says Steven Elliott, tax technical director for Houston-based accounting firm MRZ LLP. Those who have lost tax forms, such as 1099s, can pay for a copy through the IRS transcript service if they aren’t able to get a duplicate from the issuer in time.
[See: How to Reduce Your Tax Bill by Saving for Retirement.]
Special considerations for disaster zones. Not everyone is bound by the October extension deadline though. “Here in Texas, we have hurricane relief,” Elliott says. That allows people in designated counties to push back their filing to as late as Jan. 31. People who live outside designated counties but use a tax preparer in the tax relief area also benefit from the extended filing period.
Tax relief has been approved in the wake of Hurricanes Harvey, Irma and Maria as well as other natural disasters. A complete list can be found on the IRS tax relief webpage.
However, even those who have the option of waiting should consider filing earlier if they are able. “[People] should file as soon as they can if they owe money,” says Eric Bronnenkant, head of tax for online investment firm Betterment. While those in disaster relief areas won’t get hit by a late filing penalty, interest on unpaid taxes will continue to compound.
[Read: Hurricane Harvey Victims Eligible for Emergency Retirement Withdrawals.]
Last-minute tax savings options. While there isn’t much time to act, there are still a few ways to save money on taxes. “Let’s say an individual did an [IRA] conversion,” Bronnenkant says. These conversions allow a person to transfer money from a traditional IRA to a Roth IRA, which offers tax-free withdrawals in retirement. However, income taxes are due on the converted amount.
If the IRA value has dropped since the conversion, taxpayers may want to switch their money back to a traditional IRA. Known as recharacterizing, this strategy can help people avoid paying taxes on investments that are now worth less than when they were converted. “You have until your filing deadline, including an extension, to make a recharacterization,” Bronnenkant says.
Another option for those with self-employment income in 2016 is to set up an SEP IRA. While the deadline to make contributions to a traditional or Roth IRA was in April, SEP IRA contributions can be made until the October filing deadline if someone has an extension.
Elliott says it’s a strategy some of his clients have used successfully. “They didn’t have an SEP before, and they set it up last week,” he says. After making their investments, the couple saved $14,000 on their tax bill. “They thought that was a pretty good thing,” Elliott says.
However, for most people, the time has passed to find tax savings. Instead, the focus should be on wrapping up the 2016 return quickly and then turning attention to the 2017 tax year filing. “No. 1 is you’ve got to get filed,” Baldridge says. “No. 2 is you have to get a plan in place so you’re not in this same [situation] next Oct. 15.”
A tax extension can be convenient, but it can also be costly once interest and penalties are added. Even if you don’t owe any money, procrastination can be expensive. After three years, the government will take whatever refund you have coming and leave you with nothing.
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Stop Stalling: Tax Extension Deadline Is Almost Here originally appeared on usnews.com
