Despite the IRS pushing back the 2020 tax return deadline to May 17 this year, many taxpayers still filed for an automatic extension until October 15. Reasons for an extension vary and include needing extra time with your CPA to thoroughly review your options and strategies, time to gather K-1s or corrected 1099 forms, or the sheer volume of paperwork and complexity if you sold a business, rental property, or other transaction. Sometimes it’s just because you want to avoid the failure-to-file penalty, which can add up to 25% of the tax due, should you miss the April deadline.
The most important fact to remember is that an extension only provides extra time to complete the tax return—NOT an extension to pay any tax due.
If you filed an extension and did not include an estimated payment for any income tax due, you need to gather your papers and receipts and head to your CPA’s office posthaste! The sooner you file and pay can minimize the assessed penalty of 0.5% of your balance due per month or part of a month after the deadline. The amount of your failure-to-pay penalty will not exceed 25% of your back taxes. Furthermore, if you do not pay your entire balance due, you may also owe interest, which is 3% for 2020, on the unpaid amount.
The other benefit of getting in to see your CPA during the slower summer months is you have the opportunity to discuss life events that will likely affect your 2021 tax return. While most investors are panicking about a significant change to capital gains, have no doubt that your tax consultant is closely keeping an eye on the progress of proposed legislation. Right now, laws have not changed, and you should only make investment or tax moves according to your overall financial plan. Don’t tank your investment portfolio based on what might happen.
Since the market is up around 13% year to date, you and your adviser may want to consider tax-loss selling by realizing gains in certain stocks or sectors and taking losses to offset the gains. If you are unsure what to sell to implement this strategy, your financial adviser can work with your CPA to manage your tax situation.
If you have purchased or sold a business, a rental home, a primary residence, your CPA can help you mitigate any gains or losses you may have resulting from these transactions. If your tax filing status will change in 2021 because of a marriage, divorce, death of a spouse, birth of a child or even a child aging out of being a dependent, you may want to revisit your withholding to account for this change.
Finally, if you have a company-sponsored retirement account or IRA, you’ll want to ensure that you are saving as much as possible pre-tax to lower your taxable income. If you turn age 72 this year, you will need to prepare for your required minimum distribution or consider a charitable distribution if you don’t need the withdrawal for living expenses.
If you have questions on tax moves that you should make to account for any life change, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166