A taxing question: What should I do if I can’t file by April 18?
Q: I inherited an interest in a partnership dad was involved in and they tell me they aren’t sending me any tax information until sometime in the summer. They say the timing is normal. This means I can't file a complete return by mid-April. Am I going to pay a penalty for filing late for as long as I have this thing? — Paul in Viera.
A: Paul, I am sorry to hear of your dad’s passing.It is common for needed tax information to be unavailable until after the April deadline.
The first thing you should do is talk to your tax preparer about filing Form 4868, “Application for Automatic Extension of Time to File U.S. Individual Income Tax Return” before April 18. You can file by sending the paper form or filing online at irs.gov/filing/free-file-do-your-federal-taxes-for-free. There is no charge from the IRS to file for an extension, the extension is automatic and you will have until Oct. 16, 2023, to file your return.
While the extension allows you to delay filing your return and avoid a penalty for failing to file on time, it does not extend your obligation to pay the tax due. When you file your tax return, you are reconciling the difference between what you paid to the U.S. Treasury during the year with what you should have paid. If you paid more than the actual tax due, you get a refund. If you underpaid, you must make up the difference. If you file an extension and believe you underpaid, you should include an extension payment with your Form 4868.
More:Business Q&A: Can I convert my required minimum distribution to a Roth IRA?
If you underpay by too much, an underpayment penalty applies. This is a separate penalty from the one for filing late. To keep any taxable income from this partnership from perpetually exposing you to a penalty, some adjustments can be made to how and how much you pay to the U.S. Treasury during the year even if you do not know what that income will be ahead of time.
There are two main ways taxes get to the government throughout a given year. Most common is tax withholding from things like a paycheck, Social Security, or a retirement plan distribution. For taxpayers who have other income where no taxes are withheld such as a self-employed business, investment income, or a K-1 from a profitable partnership or S Corporation, it is often necessary to make quarterly estimated tax payments.
More:I'm past 70 now: Does my job affect my IRA charitable contribution?
How does one avoid penalties when they aren’t sure how much income they will receive? The tax code provides three safe harbors. The first is simply that there is no penalty if you owe less than $1,000. The other two involve either the tax due for the filing year or tax due in the prior year.
There are other items involved but in basic terms Paul, look at line 24 “Total Tax” of your 2021 return to see the tax due that year. Then add up the total of all the withholdings and estimated payments made for tax year 2022. If that total is equal to or higher than the amount on line 24 of your 2021 return (110% of line 24 if your Adjusted Gross Income is more than $75,000 or if you are married and file a joint return, $150,000), you won’t face an underpayment penalty.
Alternatively, if the total of your withholding and estimated payments for 2022 is more than 90% of what line 24 will read on your 2022 return, you would also avoid an underpayment penalty. This is a less reliable safe harbor because you may not have a good sense of what the income from the partnership will be.
Regardless, these safe harbor rules just described will avoid penalty but not interest on any taxes due. If you believe your tax due for 2022 will be more than what you have paid Uncle Sam, you should include an extension payment when you file your Form 4868. You should work with your preparer to make sure the total of all your withholding and estimated payments are adequate and timely and all the details I didn’t discuss are addressed.
Dan Moisand, CFP® is a past national president of the Financial Planning Association and has been featured as one of America’s top independent fee-only financial planners by at least 10 financial planning publications. For more info, visit www.moisandfitzgerald.com or call him at 321-253-5400, ext. 101,
This article originally appeared on Florida Today: Can't file your taxes by April 18? Here's what you need to know