May 17, 2021 is the Deadline to File Last Year’s Federal Tax Return, here’s what you need to know–
Edward A. Zurndorfer
Federal employees who have not filed their 2020 federal income tax returns should be aware that the 2020 federal income tax return filing deadline is less than one week away on May 17, 2021. While the original filing deadline was April 15, 2021, in mid-March 2021 the IRS extended the filing deadline to May 17, 2021, mainly due to the COIVD-19 pandemic situation and last-minute tax law changes made by Congress. Most states also extended their state income tax return filing deadlines. This column discusses what individuals who need additional time to file their 2020 income tax returns need to do.
An individual receives an automatic six-month extension (this year, a five-month extension) for filing their 2020 federal income tax returns until Oct. 15, 2021 by filing Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return). A filing extension can be done either electronically or via paper/mail. Note that a reasonable estimate of an individual’s 2020 federal tax liability must be included as part of Form 4868. The IRS can invalidate an extension if the estimate is either not included or is not reasonable.
It must be emphasized that an extension to file one’s federal income taxes is not an extension to pay. An individual who is requesting an extension for filing 2020 federal income taxes should make a sincere effort to calculate their 2020 federal income tax liability. Once he or she has determined that approximate 2020 federal tax liability, any federal income taxes withheld from one’s salary or pension throughout the year 2020, and any estimated taxes paid throughout 2020 should be subtracted from the approximately determined 2020 federal income tax liability in order to determine what has to be paid with the extension. But even if an individual cannot afford to pay the entire amount due with the filing extension request, the individual should still file for the extension and pay as much as he or she can. The IRS will then bill the individual for the balance due and arrangements can be made with the IRS to pay what is owed.
An extension of time to file eliminates the late filing penalty if the return is filed by the extended filing due date for 2020 income taxes which is Oct. 15, 2021. In case there is a balance due once the return is filed sometime before Oct. 15, 2021, then if an individual paid at least 90 percent of his or her 2020 federal tax liability through withholding, estimated tax payments and/or with Form 4868, the late payment penalty will not apply. However, the IRS will charge interest on any unpaid balance, starting from the original federal income tax due date of May 17,2021.
The late payment penalty is equal to ½ of one percent of any tax not paid by the May 17, 2021 filing due date. The penalty is charged each month or part of a month the tax is not paid with a maximum penalty of 25 percent. As noted previously, the late penalty can be avoided by paying at least 90 percent of the 2020 tax liability through withholding and estimated tax and/or the filing extension Form 4868, the late filing penalty will not be charged if an individual can show reasonable cause for not paying on time. The individual will have to attach a statement to his or her tax return when it is filed, fully explaining the reason for not paying on time. The statement should not be attached to Form 4868.
The filing deadline for 2020 income tax returns is also the deadline for individuals to make their 2020 IRA contribution and, if they own Health Savings Accounts (HSAs), to make their 2020 contributions to their HSAs. A filing extension does not extend the deadline for making prior year IRA and HSA contributions.
Options for Individuals Unable to Pay Tax Due
If any payment amount of the tax due can be made within a few months of filing, then as much payment as possible should be made with the 2020 return when it is filed or with a filing extension. The IRS will bill for any balance due. The cost for this will be interest assessed on the tax due at the current federal rates.
Another option is to pay by credit card. The cost is the percentage of tax as a convenience fee plus interest at the credit card rate.
An installment payment agreement is another way to pay any tax due. Internal Revenue Code (IRC) Section 159(c) requires the IRS to accept proposed installment agreements from an individual who owes less than $10,000 of income tax, excluding penalties and interest. As part of the installment agreement, the individual: (1) agrees to fully pay the balance of the 2020 tax liability within three years; (2) has not entered into an installment agreement within the preceding five tax years; (3) has not failed to file an income tax return or pay any tax shown on such returns during any of the preceding five tax years; and (4) agrees to file and pay all tax returns during the term of the installment agreement.
Individuals who cannot or choose not to use the IRS online payment agreement can fill out and submit Form 9465 (Installment Agreement Purchase) (available for download here in order to request a monthly installment plan.
Extension of Time to Pay
An individual can request a six-month extension to pay by filing Form 1127 (Application for Extension of Time for Payment of Tax Due to Undue Hardship) (available for download here). The individual must show that he or she cannot sell assets or borrow to pay the tax except under terms that would cause severe loss and undue hardship. Statements of assets, liabilities, receipts, and disbursements for three months preceding the due date of the tax are required to be submitted along with Form 1127. Form 1127 must be filed by the due date for payment. For 2020 federal income tax returns, this means that Form 1127 must be filed no later than May 17, 2021. An approved extension eliminates the late payment penalty but has no effect on interest charges that the IRS will assess.
State Income Tax Filing Deadlines
Those individuals who live in states with state and local income taxes (such as the District of Columbia, Maryland and Virginia) also need to make sure that they file their 2020 state income tax returns before their state’s filing deadline. They should check with their state’s tax and revenue departments to find out what their state’s 2020 state income tax filing deadlines are. For example, the State of Maryland’s 2020 filing deadline is July 15, 2021 while the Commonwealth of Virginia’s 2020 filing deadline is May 17, 2021.
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While the employees of Serving Those, Who Serve are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
