Did you extend your tax return for 2018?

Did you extend your tax return for 2018?
26
Apr

Many taxpayers filed extensions this year due to surprises and misunderstandings about the new rules under the Tax Cuts and Jobs Act. If you extended your tax return and didn’t pay an estimate of the tax you owe, be aware that interest and penalties are now accumulating. When you extend your tax return, it’s in your best interest to file and pay tax owed as quickly as possible.

Here’s a quick rundown of what you should know if you haven’t filed your return.

Relief from the underpayment penalty

Typically, the IRS charges an underpayment penalty if you don’t pay enough in taxes throughout the course of the year. In the past, the IRS required you to prepay at least 90% of your tax liability in order to avoid a penalty, or 100% of your prior year’s liability (whichever is less). When the sweeping tax changes hit on January 1, 2018, the IRS made quick adjustments to the withholding tables. Unfortunately, those adjustments missed the mark, and numerous taxpayers have discovered that they didn’t have enough tax withheld from their paychecks in 2018. The IRS has lowered the 90% threshold to 80% for 2018. What does that mean for you? If you paid in 80% of what you owe for the year, you won’t be hit with a penalty. Use Form 2210 to formally request the waiver.

If you filed early and paid the penalty before the IRS adjusted the threshold, you may be eligible for a refund. Use Form 843 to make the request.

Understand the differences between the standard deduction and itemizing

Even if you itemized your deductions in the past, there’s a good chance you won’t do so this year because the standard deduction will be greater than the sum of your itemized deductions. As in years past, deductions like mortgage interest and charitable contributions count toward itemizing. If you take the standard deduction, you don’t receive a specific credit for those on top.

However, there are tax credits and deductions that may still impact your tax bill. The rules for the dependent tax credit have changed: the credit has increased for children up to age 16 and a new credit is available for dependents who aren’t children. Another noteworthy item: if you’re paying student loan interest, you can still receive an adjustment to your income even if you’re taking the standard deduction (assuming you fall within the qualifying income thresholds).

If you have business income, be aware of new rules

First, the good news. Section 199A allows for a flat 20% deduction from income earned through a sole proprietorship, partnership, S-corp, trust, or estate (certain types of businesses, such as law firms, accounting firms, and medical practices, are subject to income limits). In return, the IRS released new rules for handling business meals and entertainment expenses, so your business books may need some work before you can prepare your return. If your business made a like-kind exchange (e.g. trading in a vehicle) in 2018, you may owe tax on the trade. We highly recommend that businesses of any complexity work with a professional to understand all the implications of new tax rules. Even if you didn’t extend your tax return for 2018, these rules will come back around for you next year. Now is the time to plan ahead.

What to do if you can’t pay the tax you owe

It’s a relatively common mistake to realize that you owe more in taxes than you have cash on hand and extend your tax return to give yourself more time to figure things out. Unfortunately, putting off the IRS is just about the worst response to finding yourself in such a situation. Many people aren’t aware that the IRS has programs available to help you pay the tax you owe and reduce the penalties that accrue by avoiding payment. The best course of action is to complete your return and contact the IRS to arrange a payment plan or review other options. We can also help you understand your options and choose the best course of action.

If you filed an extension, we’re here to answer tax questions and help you finish your return, ensuring you follow the new rules while still taking every deduction and credit for which you’re eligible. Contact us if you need help.