If you received a stimulus payment, COVID-related grants or loans, or are collecting unemployment, you may be wondering how these financial components may effect your return. The good news is that they don't—yet, at least. Any aid you receive(d) in 2020 is applicable for your 2020 taxes, which you'll prepare and file in 2021. Which is to say that they have no bearing on the 2019 tax deadline this week.
What does matter for the 2019 tax deadline, though, is being able to pay your bill, if you have one. This deadline is rarely welcome; however, in light of the pandemic-induced economic chaos, you may find yourself in an exceptionally precarious financial situation, making payment difficult if not impossible.
To that end, below, two experts offer advice for navigating unwelcome tax bills in this difficult moment. And while your mind is on your money, they also unpack what you can expect and start prepping for regarding your 2020 return. After all, we're already halfway through the year, and procrastination—literally, in this case—doesn't pay.
7 tips for navigating the 2019 tax deadline
1. Payment is due on July 15, even if you get an extension
If the updated 2019 tax deadline is catching you off guard right now, you can file an extension for October 15; however, if you owe money, you must pay it on July 15. "It's just an extension to file, not to pay," says Lisa Greene-Lewis, CPA and tax expert at TurboTax.
If you haven't yet done your taxes and, therefore, don't know how much you owe exactly, you can approximate 20 to 25 percent of any pretax income you made in 2019. Many sites have tax calculators you can use as reference points, too. If you overpay, you'll be refunded, but if you underpay, you'll either be billed the difference or billed and fined, depending on the extent to which you underpay. (So it's best to err on the side of overpayment, if possible.)
2. If you can't pay what you owe, you can set up a payment plan—but know the fine print involved:
If you're not prepared to pay your tax bill right now (see: pandemic and economic crisis), you have several options. One is to set up an installment plan. Greene-Lewis and Christina Taylor, head of operations for Credit Karma Tax, say you can either commit to a short-term plan, which requires you to pay within 120 days, or a long-term plan, which allows you to pay over six years. There is no setup fee on the former but there is on the latter.
The downside to both agreements is that they incur interest and penalties; however, these costs are significantly lower than the interest and penalties you'll pay if you fail to file or pay anything at all.
3. If you can't pay, you can also try negotiating your total amount owed down
If you don't own significant assets and have some (just not all) funds available to put toward your bill, Taylor recommends you look into what's called an "offer in compromise" instead of an installment plan. Essentially, this is where you negotiate with the IRS to pay an amount of money that's less than what you owe, but all in one chunk instead of over time.
Essentially, an offer in compromise is where you negotiate with the IRS to pay an amount of money that's less than what you owe, but all in one chunk instead of over time.
If you go this route, start by filling out this pre-qualifier form, because Taylor says the IRS is more likely to approve your offer if you pre-qualify. Greene-Lewis agrees this may be a better option than an installment plan for some people, but adds that it ultimately depends on your individual financial situation.
4. You can delay collection action on your payments going forward
If you do opt for a payment plan and end up unable to make a payment because doing so would impact your ability to meet your basic living expenses, you can request a temporary delay on collections. You will still incur penalties and interest, but this stops the IRS from taking further action, says Greene-Lewis.
5. Generally speaking, if you can't pay, you might want to actually call the IRS
"The IRS has said that they're well aware that most people will not be able to pay their tax debt, so they're looking at different ways to help people," Taylor says. "I would just call them and ask what they can do."
6. If you owed in 2018 and can't pay what you owe in time for the 2019 tax deadline, you may be penalized
Basically, if you owed money last year and then this year, you owe about the same amount and can't pay it in full, the IRS may ding you for not anticipating (and saving for) the amount due, says Taylor.
7. If you're owed a refund, you may get a (small) surprise bonus this year!
According to Taylor, the IRS has committed to paying a small amount of interest on refunds delayed due to the new filing deadline; however, she says it's likely to be somewhere around just $5.
5 things to know now when planning for your 2020 tax return
1. Unemployment benefits are taxable
Unemployment benefits are taxed unless you agreed to have it pre-taxed when you signed up. If you received the full federal pandemic benefit, this means you will owe taxes on $9,600.
"If people can start having taxes withheld from their unemployment, put any money away, or make estimated tax payments so they don't owe a whole chunk of tax on almost $10,000 of income [they should]." —Christina Taylor, head of operations for Credit Karma Tax
"Most people are just trying to make ends meet and aren't thinking about the tax implications they may face next year, but it's important for them to plan now," says Taylor. "If they're able to start having taxes withheld from their unemployment, put any money away, or make estimated tax payments so they don't owe a whole chunk of tax on almost $10,000 of income [they should]." She recommends estimating around 20 to 25 percent, or $1,920 to $2,400.
2. Stimulus payments are not taxable, and they could actually earn you money on your 2020 tax return
The one-time stimulus payments of $1,200, or some percentage of $1,200, are not taxable. And if you end up earning less in 2020 than what the amount the IRS based your stimulus payment on, Taylor says you'll receive a credit for the discrepancy on your 2020 taxes.
So, let's say you were sent a $900 stimulus check but, based on your 2020 return, you could have qualified for the full $1,200. In that case, you should get a $300 credit on your 2020 return. If you end up making more in 2020 than you did in 2019, and, therefore, should have received a smaller stimulus than you did, though, you will not have to pay that extra cash back.
3. Other pandemic-relief measures may benefit you in 2020, too
If you received or receive qualified sick or family leave this year, says Greene-Lewis, you may get a tax credit on your 2020 return. This may be something to keep in mind as you calculate payment or refund estimates for next year.
Under the CARES Act, self-employed individuals may also defer the payment of 50 percent of the social security tax on net earnings from self-employment from the period between March 27, 2020 and December 31, 2020. You will have to pay them eventually, however; on December 31, 2021, you'll owe 50 percent of the deferred amount, and on December 31, 2022 you'll owe the remaining balance.
4. If you're paying for extra childcare for a child who can't go to school, you can get credit for that cost
The IRS is offering credit for childcare fees, says Taylor. So, she says, make sure to have the tax ID number or social security number of your childcare-provider on hand.
5. Even though we're halfway through the year, it's not too late to start budgeting for next year
In fact, says Taylor, you absolutely should do this. "I would recommend what we call a paycheck checkup, where you can see where you're at for the year and where you will end up [in terms of payment or refund] if you continue on that trajectory," she says. "Since we're at the halfway point of 2020, it's a good time to make changes if needed to make sure you don't end up with a large tax bill at the end of the year."
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