By Karen Hube
April 11, 2022
If you ever pondered asking for an extension for filing your taxes, this might be the year.
As the April 18 tax-filing deadline approaches, taxpayers may need more time to deal with complexities and circumstances unique to the 2021 tax year, such as the partially paid child tax credit . On top of that, many previous years’ returns haven’t been processed yet by the Internal Revenue Service, making filing this year’s return more tricky.
More time to prepare your return can prevent having a return flagged for errors, which can result in overpayments, a monthslong delay in a tax refund or an audit.
“A return that gets identified with an error may sit for a while, given the IRS’s backlog,” says Justin Miller, national director of wealth planning at Evercore Wealth Management, referring to the 11 million unprocessed tax returns at the IRS at the beginning of the tax season. “It’s exponentially easier to file for an extension and get things right the first time, than deal with the challenges of filing an incorrect return.”
The IRS will grant a tax-filing deadline extension to Oct. 15 with no questions asked, as long as you file a Form 4868 by April 18.
“I’ve dealt with a number of individuals who said they didn’t get a chance to file a return by the April deadline and want to file an extension,” says Angela Anderson, an accountant with Just Answer in Atlanta. “But beyond April 18, you can’t file for an extension.”
Extensions are for tax returns only—not tax payment. Taxpayers must submit estimated tax payments by April 18. Any underpayments will be subject to penalties and interest—not just by the IRS, but also your state tax authority, which may pack a bigger punch, says Gregory Re, a partner at Martin DeCruze and Co. in Stamford, Conn.
While the IRS charges a 0.5% monthly penalty on any amount underpaid after April 18, Connecticut and Massachusetts charge a 1% monthly penalty. Pennsylvania charges a flat 5% on any underpayments. Annual interest charged by the IRS and states is generally the same, currently 3%.
“Estimate your taxes carefully to avoid penalties—or overestimate to be safe and you’ll get a refund later,” Re says. “States can be severe, so if you’re short on cash, it may make sense to pay the state first.”
Consider taking more time to file under the following circumstances:
You May Be Eligible for New and Enhanced Credits
More taxpayers are eligible for credits than in past years. Old credits have been expanded to relieve pandemic-related financial hardships, and a $1,400 per-person recovery rebate credit was created as economic stimulus under the American Rescue Plan in early 2021.
While more and bigger credits is good news, getting a handle on each credits’ new rules for 2021 can make your head spin.
For example, the child tax credit was increased to $3,000 from $2,000 per child under age 17 and there is an extra $600 allowable for kids under 600.
What may be confusing is that the credit is normally claimed in full on a tax return, but part of the 2021 credit was paid out monthly last year. Taxpayers must figure out how much more they can claim. if any, or if they were overpaid by the IRS and have to pay some of it back.
Income thresholds for the child tax credit may also be confusing: The full credit is available to couples earning less than $150,000 and singles less than $75,000, but the old credit amount — $2,000 per child—is available to couples earning less than $400,000 and singles with income of less than $200,000.
There are at least a half a dozen other enhanced tax benefits for taxpayers—such as the child and dependent care credit, health insurance premium credit and earned-income tax credit—each with their own eligibility rules.
During last filing season, taxpayer math errors exploded to 11 million from 1.9 million due to confusion over how to claim pandemic relief on tax returns. Given that taxpayers are dealing with yet more unusual credits and stimulus in 2021, the error rate is likely to remain elevated, says Garrett Watson, senior tax policy analyst at the Tax Foundation.
Taking more time could help avert errors, Miller says.
Previous Year’s Returns Haven’t Been Processed
It’s common for taxpayers to ask the IRS to apply a refund to the next year’s tax bill. For folks whose previous year’s tax returns are part of the IRS’s backlog, those refund deferrals haven’t taken place.
Given that tax returns aren’t processed in order—if you e-file your 2021 there is a good chance it will be processed before any backed-up return from a previous year—the amount you enclose with your 2021 tax return may appear to be deficient to the IRS and you’ll start getting underpayment notices, says Jennifer Mosley, a senior tax partner at Moss Adams.
“The IRS doesn’t know what you owe until you file your tax return, so filing for an extension in this case makes sense,” she says. “Hopefully in the meantime the IRS processes prior returns so by the time you file, you won’t have any issue.”
Tax Documents Haven’t Come In Yet
Tax documents for investors in partnerships are almost always issued long after the April 18 deadline. “Some people have no choice but to file for extension because their tax documents aren’t available until as late as September,” Re says.
Other folks may be waiting for a donation receipt from charitable organization or find errors in tax forms issued by their employer or financial services firm.
SEP IRAs, SIMPLE IRAs and solo 401(k)s allow taxpayers to make contributions for a tax year up until that year’s tax-filing deadline. For example, 2021 contributions can be made until Oct. 15 this year for taxpayers with extended deadlines, Re says. “An extension can give people more time to pull money together for contributions.”
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