With the COVID-19 crisis peaking anxiety levels and disrupting everyday life, it was comforting to learn that the IRS has extended the tax deadline by three months. All taxpayers – both individuals and businesses – now have the option to defer 2019 federal income tax filing and/or payments until July 15, 2020.
On the surface, that seems like a huge help, but you may be wondering how it affects your situation and whether you should wait to file. Let’s look at why you might choose not to postpone filing and, given the tight financial situation many people are currently experiencing, explore some questions related to paying the taxes you may owe.
If you expect a tax refund, you do not benefit from the deadline extension. It is to your advantage to file as soon as possible to claim your refund. Having this money sooner is especially important if your employment has been affected by the crisis. According to the IRS, most refunds are being issued within 21 days of filing.
Even if you owe taxes, you might want to file now. You have the option to file your return now and schedule paying your taxes at a later date, as long as you pay by the July 15th deadline. Knowing what you owe now affords the opportunity to set aside funds over the next few months to put towards that tax payment.
In addition, some experts advocate filing returns sooner rather than later to help guard against fraud. If identity thieves gain access to your Social Security number, they can use it to file a fraudulent return in your name in order to claim a refund. When you later submit your legitimate return, it will automatically be rejected and you’ll be left to sort out the mess with the IRS.
What if you have concerns about being able to pay your taxes? If you are unable to pay your taxes, the IRS can help, but you need to be proactive. First, you need to file your tax return on or prior to the deadline to avoid late filing penalties. Pay what taxes you can manage by the deadline to reduce the amount subject to interest and late payment penalties. Finally, explore the available payment plans and other payment options at irs.gov/payments. You can apply online for an installment payment plan. Keep in mind that individuals who file their returns on time qualify for a reduced interest rate with the payment plan.
What about applying for a filing extension? Many people apply for a filing extension because they know they owe taxes and assume it gives them more time to pay. This is a big mistake. While a filing extension can be helpful in certain situations, it only provides extra time to file the return, not extra time to pay the taxes. Any 2019 taxes not paid by the July 15th deadline are subject to penalties and interest.
What if you need your federal refund to pay your state taxes, or vice versa? If you find it beneficial to file your federal and state returns at different times, you have that option as long as you file both prior to their respective deadlines. Ohio has adjusted its 2019 tax deadlines to mirror the federal extension, so both the federal and Ohio returns and taxes are due on July 15th. If you are expecting a refund from your federal return but owe taxes to the state, you can file right away at the federal level while postponing filing the state return.
If the situation is reversed – you owe the IRS money, but are due a refund from the state – you can still file federal and state returns at different times, but the process might be slightly more complicated. If you use paper returns, there’s no issue. You can file your state return to claim that refund prior to mailing in your federal return. However, if you use e-file software, most programs require you to first file your federal return before allowing you to file with your state. In this scenario, your best bet may be to e-file the federal return and schedule payment of your federal taxes at a later date. You can then e-file your state return to claim your state refund right away.
Consult your tax professional for further information about these and other questions, or visit irs.gov.