You May Be Able to Delay Paying Your Taxes, but Should You?

You May Be Able to Delay Paying Your Taxes, but Should You?

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Some states have announced their own delays. (Check this guide from the American Institute of Certified Public Accountants [PDF] to see whether your state has extended its deadline, and if it has, what the new guidelines are.)

If you’ve taken a financial hit in the wake of the coronavirus—maybe you were laid off, or you’re a gig economy worker whose business is shrinking—the extra time to fund your tax bill might temporarily reduce some stress and provide the relief you need to buy groceries or pay rent.

“The people who typically owe taxes are service workers or people who are self-employed, such as contractors and participants in the ‘gig’ economy,” said Greg DuPont, a tax attorney and the founder of DuPont Wealth Solutions. “This may be a welcome relief for the next few months where they are unable to work and need every dime to survive.”

It’s also a relief for small businesses that would otherwise have to make quarterly tax payments in April.

If you hold off on paying your tax bill, you will owe the money someday. But given the fast-moving nature of the coronavirus, the tax experts we spoke to said it’s okay to take things one day at a time.

“Holding onto money now may lead to an inability to pay the taxes when they are ultimately due,” DuPont said. “But that will be a problem for another day.”

And even if you haven’t been financially impacted yet, you might want the reassurance of extra cash as the coronavirus continues to ravage the economy with no end in sight.

So if you have the means, should you delay? Or should you pay your taxes now?

If you lost your income: Delay

If you lost your usual income due to the outbreak but have enough cash on hand to pay your taxes, it’s likely best to sit on the cash.

“It could give a few extra months of holding onto that money to cover necessary bills while this pandemic plays out,” said Paige Schaffer, CEO of Global Identity and Cyber Protection Services at Generali Global Assistance, a provider of travel insurance, identity theft protection, and other services.

Come back and pay your taxes when your next revenue stream is more certain—or once the new July deadline inches closer.

If you need that $1,200 stimulus check urgently: File now, pay later

The government on Wednesday agreed on a $2 trillion stimulus measure to bolster the economy. Individuals with adjusted gross incomes of up to $75,000 per year are expected to each get a $1,200 check (some Americans earning more than $75,000 may qualify for a partial amount, and families with children could also receive up to $500 per child).

While the package still needs to pass the House, Treasury Secretary Steven Mnuchin said he thinks Americans will start receiving stimulus checks “within the next three weeks.”

Details of when and how checks will be sent are still opaque, but Jack Smalligan, a senior policy fellow at the Urban Institute, said he expects the checks to go out in waves. He added that the first batches will likely go to people who have already filed their 2019 tax returns.

If you’re tight on cash, file your taxes now (you don’t have to pay at the same time you file). You may get your stimulus check earlier, which might be as useful as getting an extended due date on your tax bill.

[Check out this comprehensive Q&A from The New York Times, Wirecutter’s parent company, about how the stimulus package may affect your money.]

If you were planning to pay your taxes on credit anyway: Delay

If you know you’ll have the money later—and if you always intended to pay your tax bill on credit—you may as well delay. The government is essentially giving you an interest-free loan between now and July 15.

Plus, interest rates have already dropped and could fall even further, potentially reducing how much you ultimately have to pay.

If your income hasn’t changed and you have the cash to pay now: It depends

You have an interest-free loan, so it might make sense to take advantage of it. Most experts agree that you should keep between three and six months’ worth of expenses in an emergency fund. But given the economic uncertainty around the coronavirus, it might be wise to err closer to six months for now. Having that extra cash cushion for three months might make you feel more comfortable.

Then again, it might be more psychologically gratifying to pay off your debt now. You have to pay the money at some point anyway, so if you just want to take care of it so that you no longer have to account for the bill in your budget (and if you’re financially secure), that’s okay too.

If you’re worried about tax fraud: Pay now

The extension is generally more relevant for people who owe taxes, but even those who expect to get money back might find the new deadline to be a relief. The coronavirus has abruptly turned people who used to have one job into full-time caregivers, teachers, cooks, cleaners, and more. Suddenly, the idea of logging in to Credit Karma to file your taxes while your kid has commandeered your computer for their virtual clarinet lesson feels impossible.

But if you’re worried about tax fraud—and everyone who expects a refund should be, to some extent—file now.

Tax-related identity theft typically occurs when someone gets ahold of your Social Security number and files a tax return using your name in order to claim a fraudulent refund.

Other means of fraud include phishing emails, scams in which thieves claim to be from the IRS and ask you to send them money, and even schemes involving deposits to your own bank account. The longer you wait to file, the more time a scammer has to find your information and take advantage of you.

“We always advocate to file as soon as possible, as this gives criminals less time to perpetrate tax fraud, thus closing their window of opportunity,” Generali’s Schaffer said.

Since the IRS allows only one tax return per Social Security number per year (processed on a first-come-first-serve basis), it’s always better if you, not a scammer using your Social Security number, are the first to file.

If an imposter files a fraudulent return under your profile, you could end up falling down a rabbit hole of IRS paperwork, having to obtain an Identity Protection PIN for future tax filings, and needing to freeze your accounts and set up fraud alerts, among other newfound and time-consuming problems.

Schaffer pointed to emerging sources of coronavirus-related fraud in other industries, and said she wouldn’t be surprised if thieves come for your tax returns next.

“Already, we’re seeing bad actors take advantage of the pandemic, pitching everything from coronavirus treatments to economic relief under the guise of the government,” she said. “It’s more important than ever to stay vigilant.”

Here are some other general tips for avoiding tax fraud:

  • Keep your Social Security number private.
  • Use a password manager to help you generate strong, unique passwords for your financial accounts.
  • Don’t click on email links or open attachments from senders you don’t know.
  • Don’t provide personal information over the phone if you didn’t initiate the call. In fact, the IRS never requests financial or personal information in email or phone communications (it typically sends a letter).

What you need to know about the new July 15 tax deadline

All taxpayers, including individuals, people who are self-employed, trusts and estates, corporations, and other non-corporate tax filers can now defer federal income tax payments that were previously due on April 15, 2020, to July 15, 2020, without paying any penalties or interest.

The extension applies regardless of how much you owe, and you don’t need to file any additional paperwork to qualify—it’s automatic.

You don’t need to pay your taxes at the same time you file. If you owe money that you don’t currently have on hand, you can still file now (to mitigate risks like potential tax fraud) and pay later, when it’s more convenient for you.

What if you need more time beyond July 15? If you’re an individual taxpayer, you can request an extension by filing Form 4868 through your tax professional, the online tax software of your choice, or the IRS Free File Online program, if you qualify (we like the TurboTax version).

If you’re a business, you must file Form 7004.

You can also call the IRS at 800-829-1040 to discuss relief options, which may include:

  • another short-term extension
  • an installment agreement, which lets you pay your tax debt in monthly payments (you typically still owe interest and penalty charges)
  • a temporary delay in the collection process
  • waived penalty fees (the IRS does not waive interest on unpaid tax bills)

If you have money to pay some—but not all—of your tax bill, it’s generally a good idea to pay as much as you can.

And don’t feel like you’re taking advantage of the system by waiting until the last week to file and pay your taxes. Putting off the headache now only means you have to deal with it in the future.

The most popular time to file taxes is the very last week you can file without an extension, according to the IRS. In 2019, the IRS received the largest amount of tax returns—more than 17.8 million—during the week of Tax Day. The second most popular week to file taxes last year was the first week of tax season, presumably because people expecting a refund wanted their money.

And that’s the other thing: If you are getting a refund, you should file ASAP and get your hard-earned money back in your pocket.

Will the new tax deadline actually help the economy?

Experts aren’t exactly sure whether the extra time to file returns and pay any potential tax burdens will provide a boost to the economy. “Although the tax payment deadline is delayed, there is no fundamental change in the underlying tax obligation,” DuPont said. “Unless there is some retroactive change to the tax structure, which is highly unlikely, those existing taxes will still need to be paid.”

But for some, the ability to buy more time at no cost might be worth it to alleviate short-term stress. Even if you’re getting a tax refund, the new deadline may offer relief if the coronavirus has made life busier (maybe you work in an industry experiencing an uptick in business due to the coronavirus, or you’re a parent who’s suddenly having to manage kids 24/7 now that school isn’t in session).

“Whether someone does or doesn’t owe taxes, having a bit of a cushion for three more months will certainly help,” Schaffer said.

Sources

  1. Paige Schaffer, CEO of Global Identity and Cyber Protection Services at Generali Global Assistance, phone interview, March 20, 2020
  2. Greg DuPont, founder, DuPont Wealth Solutions, phone interview, March 20, 2020
  3. Jack Smalligan, senior policy fellow at the Urban Institute, phone interview, March 25, 2020

Source: NY Times – Wirecutter
Keyword: You May Be Able to Delay Paying Your Taxes, but Should You?

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