Filing taxes can often be a stressful time for many Americans, and for those who opted for extensions, the clock is ticking as deadlines approach. For the tax year 2023, approximately 19 million taxpayers in the United States have sought an extension, pushing their filing deadlines back to October 15. However, this date brings with it a host of concerns and considerations for those who want to avoid troublesome penalties and ensure compliance with IRS regulations.
Understanding Extended Deadlines: Who Benefits?
The Internal Revenue Service (IRS) understands that calamities can sidetrack even the most diligent taxpayers. Consequently, individuals residing in federally-declared disaster areas benefit from even longer deadlines. Areas impacted by hurricanes, tornadoes, wildfires, and other disasters across 25 states and various U.S. territories can find themselves up against a new deadline ranging from November 1 to potentially as late as May 1, 2025. This automatic extension provides much-needed relief for those affected by natural disasters, allowing them additional time to sort out their returns without the impending stress of an imminent deadline.
However, it’s vital for these taxpayers to recognize that even while they have extended time to file, they still must remit any owed taxes by the original deadlines. Failure to make these payments can lead to significant penalties, which can compound quickly if not addressed.
Penalty Structures and Best Practices
For the majority of filers who requested extensions, submitting the tax return by the October deadline is crucial. Failing to do so can result in a penalty of up to 5% of any unpaid taxes for each month the return is late, capping at 25%. Moreover, if taxpayers fail to make adequate payments by the original deadline of April 15, they could face an additional late payment penalty of 0.5%. It’s a considerable financial burden that smart planning can alleviate.
To minimize potential penalties, financial experts recommend estimating tax liabilities and making partial payments even before filing. As noted by Miklos Ringbauer, a certified public accountant, proactively addressing payment obligations can drastically reduce penalties associated with underpayment. Taxpayers can sidestep the failure-to-file penalty altogether if they file for extensions and engage in payment planning.
In the unfortunate event that a taxpayer finds themselves unable to pay their owed taxes immediately, the IRS offers options for payment plans. These plans come in two varieties: short-term and long-term. Taxpayers owing $100,000 or less can apply for a short-term plan that allows for payment over a maximum of 180 days. Conversely, a long-term plan is available for those with under $50,000 in total tax obligations, enabling monthly payments.
It’s important to note that while these payment plans offer a respite from the full payment due, interest continues to accrue on the unpaid amounts. Taxpayers already on an installment plan will benefit from a significant reduction in failure-to-file penalties. This acknowledgment highlights the IRS’s commitment to helping taxpayers navigate their obligations without inducing inordinate financial strain.
Although immediate concerns may dominate discussions, an essential aspect of tax management involves long-term planning. With the 2017 Tax Cuts and Jobs Act set to expire at the end of 2025, higher tax rates may loom on the horizon. Financial strategists like Jim Buffington suggest this could be an advantageous period for capital gains acceleration or income shifting. Preparing ahead not only helps mitigate potential tax liabilities but also allows individuals to strategize other financial decisions in tandem with tax obligations.
In addition to longer-term strategies, taxpayers should consider adjusting their withholding or making estimated tax payments for 2024 to prevent any unexpected tax bills when they file in the following year. Awareness and proactive adjustments can lead to a more streamlined tax experience, eliminating the chances of unnecessary penalties or financial surprises.
As taxpayers approach the final filing deadline for their 2023 returns, it is critical to be proactive. Understanding the requirements, making timely payments, and engaging in strategic tax planning can provide a pathway to compliance and peace of mind.