What If? Tax Questions
As the April 15 tax filing deadline approaches, we have answers to some common tax questions that you may have as a result of today's economic instability.
Did you know there may be a tax impact caused by events such as losing your job, having a debt forgiven or reduced (settled), or making a withdrawal from your IRA or other retirement account? Each of those things have an impact on your tax situation.
Also, if your income has decreased, you may have become eligible for additional tax credits such as the Earned Income Tax Credit.
The IRS (Internal Revenue Service) recognizes that times are difficult. They have programs in place to answer your tax questions and help ease the burden in certain situations. If you think you might have trouble paying your tax bill, contact them immediately to try to work out a payment arrangement.
Also, be sure to file your return (or request an extension) even if you are unable to pay the full amount of tax due, so you can avoid additional penalties. There are separate penalties for failure to file and failure to pay. You want to minimize any penalties that might be assessed.
Remember that if you file for an extension of time to file using Form 4868, that is not an extension of time to pay. Form 4868 can be filed online using e-file from your home computer. If you do not pay the amount due by the regular due date (April 15), you will owe interest, even if you had a good reason for not paying on time. You may also be assessed penalties.
Late payment penalties are usually 1/2 of 1% of any tax (other than estimated tax) not paid by the regular due date, charged for each month or portion of a month in which the tax is unpaid, with a maximum cap of 25%. As a general rule, the late payment penalty will not be charged if you can show "reasonable cause" for not paying it on time (although you will still have to pay interest). If this is the case, you should attach a written statement explaining the reason you couldn't pay on time to your return when it is filed (do not attach this statement to Form 4868).
There is no penalty for filing a request for extension of time to file, and you are not required to give any reason for the extension request. Most requests are granted automatically. If your request is denied, you will be notified by the IRS. The automatic extension is now for a period of six months, extending your filing deadline to October 15. You may file your return at any time prior to the deadline, so if you're finished in August (or sooner), go ahead and send it in. Obviously, if you're owed a refund, you will want to file as soon as you can. There's no point in giving the government an interest-free loan of your money for any longer than is necessary.
Now, for those "What if . . .?" Tax Questions - follow the link.
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