File Something on or Before 7/15
If you can’t get your tax returns completed by July 15th, make sure to file for an automatic extension. Filing something on July 15th is the only way to avoid the Failure to File Penalty equal to five percent per month on any 2019 federal income taxes due as of 7/15/20. Yes, expect the IRS to charge you $50 per month on every $1,000 of taxes owed as of 7/15 if you don’t file your tax return or extension request by that date.
Filing for an extension is easy. Simply go online to https://www.irs.gov/payments and make an online payment or submit a Form 4868 to the IRS along with a check made out to the United States Treasury for an estimate of the taxes you might owe, if anything. Even if you’re confident you’ll be getting a refund, it’s still a smart idea to file for an automatic extension.
By submitting an extension request (Form 4868) prior to the tax return due date, the Failure to File penalty of five percent per month is replaced with a much more reasonable Failure to Pay penalty of one-half percent per month. That’s a pretty good return on your $.55 investment for the stamp used to mail the one-page automatic extension request, Form 4868, to the IRS.
Plus, if you end up owing the IRS no more than the greater of 10% of your total federal tax liability or $1,000, you should not be assessed any penalties at all, as long as you file your federal tax return by October 15th. In this case, you’ll only owe interest to the IRS at today’s very low rate on your balance due as of 7/15/20.
And While You’re At It, Fund Your IRAs
When it comes to your IRAs this year, the deadline to put away money for 2019 is July 15, 2020, even if you file an extension. This deadline applies for traditional IRAs and Roth IRAs.
For 2019, you can contribute up to $6,000 into an IRA. Anyone 50 or older as of December 31, 2019 can put away an extra $1,000. If you’re married, both spouses can contribute to an IRA provided one spouse has earned income during the year in excess of the total combined amount to be contributed.
One great reason to contribute to a traditional IRA each year is to take advantage of the rule allowing all taxpayers to convert their IRAs to a Roth IRA regardless of their income. Remember, there is a relatively modest income limitation for Roth contributions. If your 2019 AGI exceeds $137k if single or $203k if married, you aren’t allowed to contribute any money directly into a Roth IRA. However, there is no income limit for people who first contribute to a traditional IRA and then convert that money to a Roth IRA. This strategy is commonly called the Backdoor Roth.
Fund Your HSAs By 7/15 Too:
Health Savings Accounts are the only investment vehicle we’re aware of that offers the winning combination of tax-deductible contributions and tax-free distributions. Individuals with a qualifying high-deductible health insurance plan in place during 2019 were eligible to contribute up to $3,500 into an HSA account for individual plans or $7,000 for family plans. Anyone 55 or older by 12/31/19 could add an additional $1,000 to their HSAs.
HSAs are funded by your employer, through payroll withholdings at work, or by personally contributing directly into your account. You have until 7/15/20 to top off your HSA for 2019 if you haven’t already done so, even if you file for an extension.
For more info on HSAs, please check out our recorded webinar available at: https://www.youtube.com/watch?v=prYRhsR9JT0&feature=youtu.be.
Buy Three Months to Fund Your Self-Employed Retirement Account
Are you self-employed? If so, filing an extension might make a lot of sense since it buys you an additional three months to establish and fund your SEP IRA for 2020. It’s not uncommon for self-employed individuals to pay all of their taxes due with an extension, and then fund their SEP IRA, SIMPLE IRA, or Solo 401k, as well as submit their tax forms, by October 15th.