Still haven't filed last year's taxes? Here's what you need to know about getting an extension, plus some tips for planning ahead for next year.
If you're reading this between late April and December, and you didn't file your prior year's taxes, you're going to owe a lot in penalties. However, it's better to pay as soon as possible, even if you didn't file for an extension, becuase those fees (plus interest) add up for every year you don't pay. And, remember what happened to Al Capone: The IRS has a long memory, and ways of tracking you down.
If you're reading this early in the year, even April 14 or 15, read on.
If you think you can't finish your tax calculations in time to file -- whether it's because you're missing some paperwork or simply procrastinated -- you can apply for an automatic four-month extension with Form 4868. (You're supposed to get that in by the filing deadline, but if you're a day or so late it's not likely you'll be penalized.)
The extension granted applies to filing your taxes, though, not for paying them; you must make a good faith estimate of your liability. If you don't, the extension will still be allowed, but you'll be subject to interest charges and possible penalties. Also, the Internal Revenue Service will fine you an additional late-payment penalty if the check you send with Form 4868, plus whatever tax you paid throughout the year, still amounts to less than 90 percent of the total amount due for the year -- unless you can show reasonable cause for the delinquency.
You can skip Form 4868 and get an extension by phone (888-272-9829) if you charge your tax payment on a credit card (American Express, MasterCard or Discover).
If paying your tax would cause a severe hardship, you can apply for a special payment extension on Form 1127. This extension is generally limited to six months, and you'll owe interest on the late payment.
If you either owed a significant amount of money or received a large refund, consider adjusting the amount of tax you pay throughout the year. Also, if you know your tax situation is going to change (or has changed), you can make those adjustments now, rather than being surprised a year from now.
For instance, if you're about to have a baby or send a child to college, and know you're eligible for the accompanying credits, decrease your withholding now so you can get the benefit throughout the year. Alternatively, a withholding increase may be advisable if you expect additional income from capital gains, or if you're getting married and expect to owe more tax as a result of your new filing status.
If you're employed full-time, you can generally adjust your withholding amounts to compensate for changes in tax status -- all you have to do is fill out a new W-4 with your human resources department.
Self-employed, retired, and other less typical filers might need to make estimated tax payments four times a year. Generally, the payments should be substantially equal amounts based on what you expect to owe for the year, regardless of what your actual income is per quarter.
If your income typically fluctuates -- or unexpectedly changes -- during the year, you may base installment payments on the annualized income method. This method allows you to avoid a penalty for installment periods during which less income is earned by reducing the required estimated tax payment for such periods. To figure your installment payments, use the Annualized Estimated Tax Worksheet IRS Publication 505. If you base installment payments on the annualized method, you must file a form 221-0 with your return to determine if you are subject to the estimated tax penalty.
You can download all the IRS publications and forms mentioned in this article at the IRS Web site (see below).