We’ve all heard the quip that only two things are certain in life: death and taxes.
But at a time in history when 78% of Americans live paycheck to paycheck and nearly 17 million workers in the United States have filed for unemployment within the last month, never have the two felt so comparable.
Here’s what we know about taxes right now:
1. They’ve Been Around for Over a Century and Over 50 Years in Their Current Form.
America first introduced Tax Day in 1913 when Congress passed the 16th Amendment allowing the government to collect taxes on income. They arbitrarily set the date as March 1 only to push it to March 15 a few years later with the Revenue Act of 1918. With the passing of the Internal Revenue Code of 1954, the government decided to push the deadline back once more to April 15 to allow taxpayers as well as the IRS additional time for handling the new complexities of our current tax-system.
A thus, a new anti-holiday was born!
2. This Year the Deadline has Been Pushed Back.
Let’s straighten something out, initially the deadline to file was going to remain April 15 but you could pay by July 15. This is no longer the case! Now you can wait all the way until July 15 to both file and pay.
3. You Can Still File a Tax Extension.
Yes. While Tax Day is now July 15, the extension deadline remains October 15. You can get an extension on your taxes provided you file it BEFORE Tax Day (July 15). I cannot suggest enough getting a professional to do this for you. My CPA very kindly handled mine a few years ago (yep, I’ve been through this mess before too) and it was accepted. The extension was initially designed to accommodate people who:
- Hadn’t yet received all their paperwork
- Were ill or injured and unable to complete taxes as a result
- Were living abroad or working overseas during the due date
The good news is, the IRS pretty much auto-honors every on-time request they receive but, it’s not a guarantee. When I filed, it was largely due to the fact that I didn’t have the money to pay my taxes and helped by the fact that I was in the middle of breaking lease and moving out of my apartment to an at-the-time-unknown location while having also recently recovered from some health issues. It’s a true story and it sucks. Remember though, in filing an extension you are only delaying the inevitable...
4. Late Taxes, Extended or Otherwise, Still Have Consequences.
The Failure-To-File Penalty
You didn’t file an extension. You didn’t pay your taxes. You are now stuck with a failure-to-file penalty. This penalty is always higher than the one for extending!
Per month or part of a month you will now owe an additional 5% of your balance due for each month you wait. So if you owe $1,000 in unpaid taxes (back taxes) and you file your claim on August 10, you now owe an additional $50. Wait until August 20 to file? It’s now an extra $100.
If you file more than 60 days late, the amount you owe will either be 100% of the tax you owe ($1,000) or $210; whichever amount is less.
The Failure-To-Pay Penalty
You filed your request for an extension to the IRS before the July 15 deadline and it was accepted. Hurray! You still owe your taxes on July 15.
“Wait, what?!” You are shouting mid-victory dance. “What is the point of extending if I still owe the money?”
From the IRS’ perspective, the extension is designed to give you time to assemble your paperwork and file it properly. That means you are responsible for estimating what you owe and paying it. If you are a freelancer or self-employed individual, it is believed you are already estimating and paying quarterly taxes. If you are employed, it is believed you already have income tax being withheld. The IRS doesn’t understand or care why you might not have this money, or an estimate of this money so, “Pay up.” they say.
For usual tax years you can estimate and pay 90% of what’s due and avoid the penalty. For 2019 you can pay 80%. If you are expecting a refund, no penalties apply and you have up to three years to collect it. I wonder what that’s like…
The failure-to-pay penalty (even after your extension was granted) is 0.5% for each month or part of a month. Still owe that $1,000? Now your penalty is just an extra $5. The amount of this penalty will also not exceed 25% of your back taxes.
Additional bummer: if you haven’t paid that full balance due, even if you paid 90% of it, you owe interest. The current interest rate for underpayment of taxes in 2020 is 5%. That’s 5% interest on whatever portion of the amount due you haven’t paid by July 15.
Failure-To-File AND Failure-To-Pay
First of all, just get it filed! You have until July 15 to budget and prepare whether you choose to go the extension route or not.
Should you find yourself in this camp though your 5% failure-to-file penalty will be reduced by the 0.5% failure to pay penalty. So $1,000 times 4.5% which means you owe $45 per month or part of month in this situation.
If you owe $1,000 of taxes due on July 15, 2020 and you:
- Fail-to-file - You owe an additional $50 per month or part of month up to $210.
- Fail-to-pay - You owe an additional $5 per month or part of month up to 25% of your back taxes.
- Fail-to-do-anything - You owe an additional $45 per month or part of month up to 25% of your back taxes.
- Fail-to-do-anything-but-get-a-tax-return - Congratulations! none of this matters to you. You have three years to file and claim your money.
5. Due to COVID-19 Ruining My Career, I Still Don’t Have the Money
I committed one of the exact sins the IRS and every CPA tells you not to do: I filed an extension to “avoid paying” my taxes. I did this with a plan though and we’re going to pick up here in the next blog post.
If you want to know when that post comes out, sign up on the email list. I believe that financial health is the ultimate tool in musician health. I’ve been through just about every financial dilemma you can imagine and am sharing the knowledge I’ve gained along the way with you.
If you have questions you want to see answered, send me an email and I’ll do my best to prioritize the topic it in the upcoming blog posts.
Be well and keep pursuing a life of less pain and more music!