In fact, the first half of this year has been so crazy, the IRS even set a brand new deadline for filing your 2019 taxes and that date is just around the corner. But what exactly does this mean for tax filers and what sort of speedbumps could you still encounter?Deal of the Day: Credit Karma Tax offers 100% free Federal and State tax filing with a Maximum Refund Guarantee and Audit Defense. Never pay a penny to file your income taxes. Read the Full Review Here
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New Tax Date for 2020
Back in March, the IRS announced that it would be extending the usual April 15 income tax filing deadline to July 15, giving taxpayers an extra three months to gather documentation, meet with their tax professionals, and submit their filings, all with no penalty.
This was due to the unexpected impacts of the coronavirus. Businesses shut down, furloughing or laying off employees, who might have struggled to make tax payments. Tax preparers and accountants were forced to close their doors for a time, leaving many filers out in the cold when it came to actually preparing necessary documents.
That three-month extension gave everyone extra time to put their 2019 income taxes together. However, the extension has swiftly come and gone, and the new tax deadline is almost here.
With it, individuals and business owners alike may quickly find that there are some new problems to consider. Let’s talk about what you need to keep in mind for the rest of the year, why the July 15 deadline could be problematic, and how to avoid these new issues.
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New Problem #1: All the Taxes Are Due… Now
Small business owners, contractors, and other self-employed individuals are required by the IRS to make quarterly estimated tax payments throughout the year since these taxes aren’t already being withheld from their paychecks by an employer.
If you expected to owe on your 2019 taxes, the three-month extension may have been a welcomed reprieve … but now it’s time to pay the piper. Since no one was required to make federal estimated tax payments during that time, it’s all due on July 15: Q1 and Q2 for 2020, along with any additional taxes that may be owed from 2019’s filing.
If you haven’t been budgeting for this, you could find yourself in a bind.
How to avoid it: You can’t avoid paying all of those taxes, unfortunately. But if you’re struggling to come up with the funds to tackle it all right now, you can always request an extension on your 2019 taxes.
New Problem #2: Estimated Tax Penalties
If you’re self-employed and don’t make quarterly tax payments–or make too small of estimated payments–you could be subject to an IRS penalty. In order to avoid this penalty, you have to do one of two things:
- Owe less than $1,000 in taxes for the year
- Pay 90% or more of the actual taxes owed for the year or pay 100% of the total tax amount that was paid last year
If you are unable to make both the first and second quarter payments right now, you could subject yourself to this penalty when it comes time to file your 2020 taxes next spring.
How to avoid it: Sometimes, this estimated tax underpayment or late payment penalty can be waived, or the threshold can be lowered; reasons include disaster, casualty, or another unusual circumstance. While there’s no way of knowing whether or not the IRS will choose to waive these penalties for 2020, considering the circumstances this year, there is always a chance.
But what if the IRS doesn’t waive these penalties for 2020 or lower the threshold enough? Well, if you believe your own situation warrants this penalty being waived, you can always make a request when the time comes. You’ll need to use IRS Form 2210 in the process.
New Problem #3: Unemployment Payments and Income Taxes
With so many Americans out of work this year due to the coronavirus, unemployment claims have skyrocketed. If you’ve been receiving unemployment or underemployment benefits during the pandemic, how will that affect your income tax situation for 2020?
Well, it’s important to note that unemployment benefits are taxable, meaning that you will need to make federal–and state, where applicable–tax payments on the money received. This includes both your standard unemployment benefits and the extra $600 payment you may receive during the coronavirus pandemic.
How to avoid it: If you don’t want to deal with quarterly estimated payments or a potential penalty at the end of the year, you can ask that taxes be automatically withheld from your unemployment benefits. This is done by submitting a Form W-4V, or voluntary withholding request.
New Problem #4: Paycheck Protection Program Loans
If you received a Paycheck Protection Program (PPP) loan under the CARES Act, you may be able to see that debt forgiven, assuming that you used the money for approved expenses within the parameters of the program. And the good news is that the forgiven loan will not be counted as income for tax purposes.
Of course, there is a catch.
Many small businesses rely on deductions to lower their tax burden at filing time. However, if you used a PPP loan to pay certain business expenses, these (as of now) will not be allowed as deductions when you file for 2020. This means that while you don’t have to pay taxes on the free money, you don’t get to deduct as much as you usually do, either.
How to avoid it: There isn’t much you can do to avoid these lost deductions, other than hope that the IRS reverses this decision. However, there are many ways that you can boost your other deductible expenses between now and the end of the year.
New Problem #5: Stimulus Payments
Stimulus checks were sent to many qualifying Americans this spring, based on either their 2018 filed taxes or, if they had already filed, their 2019 income. If you made too much money to qualify in 2018 or 2019, you may have missed out on this check, even if your income changed for 2020 and you technically should have qualified.
How to avoid it: If you didn’t receive a stimulus check this year but will wind up qualifying due to your 2020 income, this will come back to you when you file your 2020 taxes next spring. You may want to take these additional funds into account when calculating your quarterly taxes or paycheck withholdings for the year.
Be sure to consult your accountant or another tax professional if you’re unsure how, or by how much, to make these adjustments.
New Problem #6: Income Concerns and Hardships Moving Forward
While businesses are reopening across the country, it doesn’t mean the problems are over for many Americans. Some small businesses have closed their doors forever, some individuals still aren’t earning what they were or have already lost significant income for the year, and many of those still working are having to do so with added hurdles, like children being home full-time.
All of these can impact your household income and may continue to do so for the foreseeable future. This could not only create a financial hardship within your home but may also impact whether you’re able to make required tax payments.
How to avoid it: As mentioned, you are still able to request an extension on filing your 2019 federal taxes. This extra time could make it easier to make your required payments or gather the funds necessary to do so.
If you’re unable to make estimated quarterly payments as they’re due, you could be penalized at the end of the year. However, there is always the chance that the IRS will lower the quarterly payment threshold or waive penalties for some altogether. You can also request that your penalty be waived if you have an extenuating circumstance.
Worst case scenario: you plan for the penalty. The IRS penalty is 5% of the unpaid tax to be reported, in addition to a failure to pay penalty. This is significantly less than the APR on many credit cards or personal loans, so if the alternative to not making these payments is utilizing a higher-interest product to access the funds, you may be better off taking the hit from the IRS.
This year has turned out to be an unprecedented one for many of us, with taxes being one important piece in the puzzle. While skipping taxes altogether is (unfortunately) not an option, there are some ways you can either lessen the burden or simply spread out the amount due.
Be sure to talk through these options with a trusted tax professional, to ensure that you maximize your options and do not incur any additional penalties.
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