3 Last-Minute Tax Tips From a CPAPersonal Taxes
There are only two days left until the 2022 tax deadline for filing 2021 tax returns, so if you’re burning the midnight oil getting your tax return done, here are some tips for you to consider.
1. File an extension if you don’t trust yourself.
Even though I’m a CPA, I don’t trust myself to file my taxes by the original tax deadline; I have clients to take care of!
That’s why I file an extension to extend my tax return’s deadline to October 15 (October 17 this year because October 15 is a Saturday).
Filing an extension only takes a few minutes, and it saves me the risk of not filing my return by the deadline and incurring possibly significant failure-to-file penalties.
If you haven’t filed your return yet, I’d recommend the same.
I mean, let’s face it — it’s about a week before the deadline and you still haven’t filed.
I think that establishes that you’re kind of a tax procrastinator.
And as a fellow tax procrastinator (at least with my own tax return — clients come first), I make it a point to file an extension as early as I can after my tax software is released.
So consider dropping what you’re doing right now (probably reading this article) and using TurboTax or some other tax software to file your extension for free.
2. Don’t bury your head in the sand because you have a surprise tax bill.
All too often, I see this situation with last-minute tax filers: They wait until the second week of April to start their tax return, and by the time they’ve finished it and are ready to file, they have a large surprise tax bill on their return.
And, unfortunately, what a lot of these folks do is simply not file because they don’t have the money to pay the taxes right now and so they bury their heads in the sand.
No! Don’t do that! Go ahead and file your return if you’ve got it ready to go! Or at least file an extension (which, of course, only extends the due date for your return — not your deadline to pay).
If you don’t file your tax return (or extend it and file timely by the extended deadline) and try to ignore the situation, you will face large failure-to-file penalties. The rate for this penalty is a whopping 5% of your unpaid balance per month or part of the month that you fail to file your return.
So let’s say you prepare your return this week and see that you owe the IRS $2,000. If you bury your head in the sand and don’t file your return (or at least an extension), a failure-to-file penalty will accrue on your account in the amount of 5% of your unpaid balance per month or part of a month that you have not filed.
In this case, that’s $100 per month!
However, if you file your return (or an extension), you are not subject to this penalty. You are only subject to the failure-to-pay penalty, which accrues at one-tenth the rate (0.5% per month or part of a month) of the failure-to-file penalty — in this example, only about $10 per month.
Oh, and if you don’t file your return (or an extension), both the failure-to-file and failure-to-pay penalties will accrue concurrently!
3. Take some last-minute tax deductions.
If you are running up against a large tax bill, consider taking some last-minute tax deductions by April 18 to reduce your balance or even score yourself a refund.
The most common last-minute deduction is the deduction for contributing to a traditional IRA. You can make your 2021 deduction to a traditional IRA all the way up to the unextended tax return deadline, which in this case is April 18.
While the 2021 contribution limit to traditional IRAs is $6,000 ($7,000 for taxpayers age 50 or older), taxpayers receive a tax deduction for every dollar they contribute assuming they are eligible for the deduction.
If you’re in, say, the 22% marginal tax bracket, a $6,000 contribution to your traditional IRA would save you about $1,320 in federal income taxes — and this doesn’t even include savings on state income taxes.
Keep in mind, however, the eligibility requirements for deducting your traditional IRA contributions. If you or your spouse is covered by a retirement plan at work (even if they don’t participate), your eligibility to deduct your traditional IRA contributions may be limited or eliminated. Consult a tax professional if you’re not sure.
Also keep in mind that in the long run, contributing to a Roth IRA this year may make more sense, even though it won’t benefit you on this year’s tax return. If you’re not sure what to do, consult a financial advisor.
Related: What Is a Backdoor Roth IRA?
Another common last-minute tax deduction is for HSA (health savings account) contributions. Of course, you only qualify to make these if you were covered by a qualifying high-deductible health plan last year — if you’re not sure if your plan qualifies, check with your employer’s employee benefits department or, if you’re self-employed, your plan administrator.
HSAs are particularly cool because not only can you deduct contributions you make to them, but the earnings also grow tax free (and can be withdrawn tax- and penalty-free) if you use them to pay for qualified medical expenses, including accrued medical expenses you’ve saved receipts for over the years.
And once you turn age 65, you can tap into your HSA for even non-medical expenses, though you would pay tax (similar to traditional IRA distributions) on the amount taken out for non-medical expenses.
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.