This blog post gives an overview of how to extend the due date for an individual federal income tax return (IRS Form 1040). Tax planning is largely about the details so be sure to consult with your own tax advisor so they can consider your specific situation!
When Are Income Taxes Due?
In a normal year, income tax returns AND payments are due on April 15. For 2020, the income tax filing and payment deadlines are July 15, 2020.
Remember, income taxes are paid AFTER the fact, so if you are a filing a return on July 15, 2020, the tax return relates to income you earned in 2019.
Your income tax return taxes you on items such as interest, dividends, wages, pensions, social security, and capital gains.
How Do I Extend My Income Tax Return?
File an IRS Form 4868, which is called Application for Automatic Extension of Time to File US Individual Income Tax Return.
In the olden days you would have to submit a reason to IRS for extending your income tax return. Nowadays you can get an automatic extension by filing the Form 4868 WITH PAYMENT (more on that below).
What is the Deadline for My Income Tax Extension?
Normally, April 15, but for 2020 (relating to 2019 income tax returns) the deadline is July 15, 2020. If you send your extension by mail, it must be:
- Properly addressed
- Have enough postage
- Be postmarked no later than July 15, 2020.
Does An Income Tax Extension Extend the Due Date For Sending a Payment to IRS?
No. The income tax extension only extends the amount of time you have to finalize your return (typically to October 15).
You still owe IRS payment on July 15, 2020.
The late payment penalty is usually ½ of 1% of any tax not paid by the regular due date of your return. The penalty is charged for each month or part of a month the tax is unpaid.
Example: Lucy Forgets to Include an Extension Payment
Lucy and Ricardo extend their income tax return on July 15, 2020 so that the new due date for their tax return (married filing jointly) is October 15, 2020.
Lucy forgets to send a payment with her IRS extension on April 15.
Lucy and Ricardo are retired so they have not had any income tax withholding from a paycheck or any other source during 2019. They have also not made any quarterly income tax payments.
On October 15, 2020 Lucy finalizes her return and her completed return says that she owes $10,000.
In this case, Lucy will owe $10,000 PLUS an applicable late payment penalty based on the $10,000. Lucy feels she needs a box of chocolate after seeing the bill.
What Should Lucy Have Done When She Extended Her Return?
Lucy had at least two options:
Option 1: If Lucy is confident of her ultimate income tax liability, Lucy could have included a payment of at least $10,000 with her income tax extension to prevent a late payment penalty in October.
Some tax preparers would also tack on the 1Q estimated payment to the extension payment as a safety cushion for Lucy just in case the tax liability estimate is wrong.
Option 2: If Lucy is not far enough along with her return to estimate her tax liability she can ask her tax preparer to calculate a “safe harbor” payment that ensures that she does not owe a late payment penalty on October 15.
For example, Lucy could ask her CPA to calculate the 90% safe harbor amount, which is 90% of the tax she owed in the prior year. As long as Lucy pays 90% of her 2019 income tax liability on her income tax extension date AND pays the balance of her tax bill in full on October 15 then she can avoid the late payment penalty.
Whether Option 1 or Option 2 is right for you depends on your circumstances!
What Happens If You Do Not File An Extension In a Timely Manner?
You could be charged the following:
- Interest of the short term federal rate plus 3% on the amount owed,
- Failure to file penalty of 5% of tax owed each month
Some tax payers may not have enough income in a given year to be required to file a return – you can check the instructions for IRS Form 1040 to find out if that applies to you!
We hope this has been helpful!
If you are seeking help with your estate planning and want lawyers who have the expertise to coordinate your estate planning with your income tax planning, please feel free to give our office a call!