Estimated Taxes: Who Has to Pay Them and How?

The majority of taxpayers pay their taxes due annually when filing their tax return for the year. In some circumstances, however, taxes must be paid to the IRS on a quarterly basis. These tax payments are called estimated taxes because they are based on the amount of income that an individual or business expects to make for the year.
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Filing your federal tax return after filing for an extension

filing taxes after the extension dateApril 15th may be more than six months away but it is never too soon to start thinking about how and when you will file your tax return. If all taxes due are not paid on time, you run the risk of penalties and interest. This is not a situation most people want to be in.

You avoid penalties by withholding a sufficient amount from your earnings or paying a quarterly estimated tax. However, you can get a waiver of the penalty for underpayment if:

  1. you suffered some financial misfortune caused by a disaster or “unusual circumstance” and it just wouldn’t be fair to impose a penalty, or
  2. you retired after age 62 or became disabled during the tax year

So long as your underpayment was not due to “willful neglect,” the IRS will consider overlooking the penalty. Naturally, you still have to report the estimated tax penalty in your return.

Speaking of penalties…

If you miss the April 15th tax filing date, an additional clock starts ticking. The penalties and interest on what you owe mount, and they will not stop until the matter is resolved. There are some automatic 6-month extensions for filing individual tax returns for citizens living and serving in the Armed Forces outside the United States.

Everyone else can apply for an automatic 6-month extension by filing IRS Form 4868. The form must be filed by April 15th.

If you are owed a refund, there is no penalty for missing the April 15th filing date.

The big “however”…

The IRS makes it clear that an extension of time to file your return does not grant you any extension of time to pay your tax liability.

Nevertheless, there are valid reasons…

Our personal and financial lives are fraught with the unexpected. Unforeseen circumstances--fire, flooding, business reversals--can place records keeping and tax accounting on the back burner.
On the other hand, unexpected financial windfalls or unanticipated income could have tax liability consequences. The extra filing time could provide the breathing room to gather the documentation, fill out those additional forms and take advantage of what our tax code offers to reduce that tax bill.

To recap…

When You File that Extension Request, the Due Date Gets Pushed, but...

  1. You still owe outstanding taxes
  2. The tax must be paid by April 15, or penalties/interest will accrue
  3. If you cannot pay all/anything, consider requesting a time payment or offer in compromise. (Note: Expect an additional charge to set up a payroll deduction or direct debit agreement to pay off your tax bill.)

Your extension request is in. Now what?

If you need assistance with filing your tax return that is on extension or are considering extending a tax return in the next tax year, reach out to us. We can assist you with the process from start to finish.

Lower your Tax Liability with Deductions and Credits

Tax deductions and credits help taxpayers reduce their tax liability. The differences between the two are in their definitions:

  • A tax deduction reduces your gross income and arises from a deductible expense. Taxpayers can take a standard deduction up front or itemize expenses.
  • A tax credit is an amount of money applied directly to the tax liability. Tax credits are far less common.

About Tax Deductions

Say your adjusted gross income for 2014 was $75,000. If you filed jointly with a spouse and were born before January 2, 1950, your standard deduction would have been $14,800. You figure your income tax bill based on a reduced income of $60,200.

There are, however, other “above-the-line” deductions you can claim to lower the aforementioned $75,000 adjusted gross income. For tax year 2014, those deductions are listed on lines 16 through 21 on Form 1040A and lines 23 through 37 on Form 1040. Deductions common to both forms are:

  • Educator expenses
  • IRA deductions
  • student loan interest payments
  • tuition and fees

Taxpayers wanting to take advantage of business, health savings, moving, self-employment, alimony payments and other expenses, need to file Form 1040, fill out the additional IRS forms and hope for the best -- the “best” being avoidance of an IRS audit trigger.

small business accountant tax savingsThe alternative to taking the standard deduction is to fully itemize your expenses for the tax year. To be worth the trouble, your itemized expenses must exceed the standard deduction. Attach Schedule A to Form 1040 to document the following:

  • Medical and dental expenses that exceed 7.5% for seniors’ and 10% of younger taxpayers’ adjusted gross income
  • State and local taxes
  • Interest payments on home mortgages, etc.
  • Charitable gifts of at least $250 in cash or $500 in other than cash
  • Casualty or theft losses
  • Unreimbursed job expenses
  • Other miscellaneous deductions specified in the Schedule A instructions

If your adjusted gross income was not over $152,525 for 2014, your deduction was not limited. Wealthier taxpayers must use a worksheet that reduces the overall deduction that can be claimed.

About Tax Credits

If you can claim a tax credit (lines 31 through 38 on form 1040A and lines 48 through 54 on Form 1040), you can subtract that amount from the taxes you owe. It is a 100 percent, dollar-for-dollar tax relief, regardless of your taxable income. Tax credits for individual taxpayers are far less common and generally apply to the following:

  • earned income tax credit
  • education credits
  • child and dependent care credits
  • child adoption credits
  • saver’s credits

Business tax credits, on the other hand, run the gamut from general business, investment, electric vehicle and other energy credits to mine rescue team training. The credits are designed, among other things, as incentives for community development, research and energy savings.

The Bottom Line:

For the average taxpayer, tax deductions lower the amount of income subject to federal income tax. Unless you have had large deductible expenses during the tax year, taking the standard deduction is the easiest way to complete your tax return. If you can qualify for a tax credit, which will apply dollar-for-dollar to reduce your tax bill, you can offset your tax liability.

Contact Dmitry Dukhon at Dukhon Tax to help you get organized, file your returns and answer any questions you may have. We can be an invaluable resource for you to make the process as smooth as possible.