The clock is ticking for taxpayers who filed for an extension

Personal finance

Julie Thurston | Getty Images

It’s cram time for entrepreneurs and other taxpayers with complicated income tax returns.

That’s because the Oct. 15 deadline for taxpayers who filed for an extension with the IRS is right around the corner.

Though these same taxpayers were able to get more time to work on their 2018 tax returns, they still needed to pay any taxes owed by April 15.

If you’re on track to miss the Oct. 15 deadline, prepare to pay a 5% “failure to file” penalty, so try not to wait until the last minute.

“You would think most people going out to Oct. 15 would be better prepared, but no — they still get it in very close to the deadline,” said David Oransky, a CPA with Laminar Wealth in Chesterfield, Missouri.

The 2018 tax season was a complicated one for accountants and filers.

It was the first time taxpayers submitted returns under the Tax Cuts and Jobs Act. The new law nearly doubled the standard deduction, eliminated personal exemptions and put new limits on certain itemized deductions.

A new 20% tax break for entrepreneurs — the qualified business income deduction — also came with its share of complexities, which led accountants to encourage those filers to ask for more time.

Here’s what taxpayers should know if they’re about to hit that extension deadline.

Why the delay

Hero Images | Getty Images

Accountants pointed to a handful of factors around why filers are submitting late returns.

For starters, investors in partnerships need to obtain Schedule K-1 from those businesses in order to file their own personal tax returns. These forms detail the investor’s share of income from the partnership — and they often don’t show up until late spring.

Further, small-business owners — including the owners of those partnerships themselves — were eager to see if they were eligible for the new 20% qualified business income deduction.

The regulations underlying this new deduction were in flux for most of 2018 and part of 2019.

The IRS proposed new guidance on this tax break in January 2019 and finalized a safe harbor for real estate owners in September.

It was ultimately a better idea to wait for clarity, rather than rush the returns to the IRS in April, accountants said.

“While we have an idea on a client’s situation as to whether they’re a trade or business, we were waiting until later for additional guidance,” said Chris Hesse, CPA and chair of the American Institute of CPAs’ tax executive committee.

“We think your risk goes down if we wait as long as possible to file,” he said.

Planning takeaways

Hero Images | Getty Images

It might be too late to save on last year’s taxes, but you can still use your 2018 return to sketch out a strategy for the remainder of this year.

Here are a few considerations:

Review your tax withholding. If you owe more than expected, consider updating your Form W-4 — that’s the form that your employer uses to withhold the right amount of tax from your pay. There are only three months left in 2019, so you don’t have much time to get it right.

“For the next few months, add additional withholding,” said Nathan Rigney, lead tax research analyst at Tax Institute at H&R Block.

Consider charitable contributions. With the higher standard deduction of $12,000 for singles and $24,000 for married-filing-jointly, and filers may need to donate aggressively to itemize their tax returns.

More from Personal Finance:
What to know before you give your kids a debit card
Where you can retire nicely on just $30,000 a year
Money secrets of single-income families

This means you cram multiple years’ worth of charitable gifts into one year so you can get over the standard deduction.

Got a small business? Think about buying equipment. Entrepreneurs can deduct the cost of certain property purchased for their business.

“If I have a good year in 2019, and I’m in the top tax bracket, I may as well buy the equipment now, get it placed in service and take a deduction for 2019,” Hesse said.

Articles You May Like

Dementia Prevention Strategies Everyone Can Try
Biden will announce new student loan forgiveness plan impacting tens of millions of Americans
How Unexpected Career Pivots Can Lead To Job Satisfaction
IRS: You have ‘options’ if you can’t pay your taxes by the April 15 deadline
China’s commercial property segment is seeing some bright spots amid a slump in the wider realty sector

Leave a Reply

Your email address will not be published. Required fields are marked *