Not your favorite topic… I know. But I’m SO PROUD of you for reviewing this article. No one wants to pay extra penalties for not making a deposit with the IRS. So I want to give you a few tips to make sure you understand the rules when it comes to filing a personal extension. Remember an Extension is NOT an “extension” to pay any taxes you may owe, but an “extension” to file. Thus, it’s important to consider if you ‘owe’ and should send in some money with your extension.
Now some of you may say…”well, I’m not going to send in any $$ so I’ll just forget the extension all together”. NOT GOOD!! The Extension (Form 4868) is more important than the deposit of $$. IT’S CRITICAL you still file an Extension!! The failure-to-file penalty (in other words failure to file an Extension) is more than the ‘failure-to-pay penalty’ and you don’t want to compound the problem by not filing an Extension.
So back to the $$. I KNOW you’ll file an extension, but how much should you pay with your Extension…if anything at all??!! This is the golden question.
The reality is that it is an ‘estimate’…and you want to do your best to get within 90% of what you think you may owe. Here are some general guidelines:
General Guideline #1– Your Extension, FORM 4868 is due by April 17th this year, and we HIGHLY RECOMMEND it’s postmarked. The automatic extension to file your actual tax return is good until October 15th. If you are a current client of ours, OR have signed an Engagement Letter with us for this year, we will file this Extension for you.
General Guideline #2– If you request an extension of time to file by the tax deadline and you pay at least 90 percent of your actual tax liability with the extension, you will not face a failure-to-pay penalty if the remaining balance is paid by the extended due date.
General Guideline #3– If you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes.
Safe Harbor #1 – If you didn’t owe last year, and you made about the same amount of money, and had the same withholdings or made the same deposits…DON’T STRESS…don’t send in a payment.
Safe Harbor #2 – If you owed $$ last year, and you made about the same amount of money, and had the same withholdings or made the same deposits… DON’T STRESS…just SEND in the same amount you paid LAST YEAR with your 2016 Extension.
Safe Harbor #3 – If you made more money in 2017 than you did in 2016, then you need to do a little math. First, think of what tax bracket you’re in. (Tax Bracket Below). Then multiply your tax bracket by your increase in income. Say you’re in the 25% bracket and you made $50,000 more in 2017 than you made in 2016, that would be $12,500 ($50,000 x 25%). Next, take this additional $12,500 and send it in with the tax you paid last year (on your 2016 return). Also, keep in mind any additional tax you may have already withheld or deposited in some other way during 2017.
2017 Federal Individual Income Tax Brackets
Tax Rate Single Married/Joint & Widow(er) Married/Separate Head of Household
10% $1 – $9,275 $1 – $18,550 $1 – $9,275 $1 – $13,250
15% $9,276 to $37,650 $18,551 to $75,300 $9,276 to $37,650 $13,251 to $50,400
25% $37,651 to $91,150 $74,301 to $151,900 $37,651 to $75,950 $50,401 to $130,150
28% $91,151 to $190,150 $151,901 to $231,450 $75,951 to $115,725 $130,151 to $210,800
33% $190,151 to $413,350 $231,451 to $413,350 $115,726 to $206,675 $210,801 to $413,500
35% $413,351 to $415,050 $413,351 to $466,950 $206,676 to $233,475 $413,501 to $441,000
39.6% over $415,050 over $466,951 over $233,476 over $441,001
If you’re not sure, look at your 2016 taxes paid, versus your income, or even use 25% as a starting point and go up or down from there based on your income bracket. Next, come up with a figure of how much more money you made in 2017 compared to 2016 and DIDN’T already withhold or deposit some taxes on that amount. Then multiply your tax rate (let’s say 25%) by your additional income, or the income you didn’t pay taxes on yet (for example$50,000). Thus, your additional tax owed would be $12,500 ($50,000 x 25%). Finally, take the $12,500 and add this to any additional tax you paid with your 2016 tax return (separate from withholdings) and send it in with your Federal Extension.
DISCLAIMER: This is important!! When using any of the Safe Harbor’s above, please know that we are not guaranteeing you still may not owe taxes when you file your return, OR that you won’t have penalties. This is simply an estimate to help you get a jump on what your taxes are for the year. Keep in mind this is STILL a fantastic step to take in order to reduce or eliminate the chance of any penalties. Again, try to deposit 90% of your estimated taxes and you’ll be doing great!!
What about your State? With your State taxes, follow the same method above. Run the numbers and if using Safe Harbor #3 probably use an estimated percentage rate of 8% as a good round number for most states. As for the extension, MOST States don’t require their own extension. Just do a quick Google Search for your State’s rules regarding your extension.
The NEBDG Blog, by our Tax & Legal instructor Mark J. Kohler, is "The Real Estate Investment Conversation You Can Rely On." Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the books “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions” and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com. Let us know if there is a topic you would like to discuss!