Tax Tips for Last-Minute E-Filers
COVID-19 means you had a few extra months to file your federal taxes this year. But that extended deadline is now just days away. If you've waited to file, here's what you need to know.
In a traditional year, your taxes would now be long overdue, but 2020 is as far from a normal year as possible. The COVID-19 pandemic has the weakest of silver linings. The federal government and all the states with income tax pushed back the filing deadline (even for extensions) to July 15, 2020.
But that means you've only got a couple days left.
According to AICPA tax filing guidance, some states have even later deadlines: Iowa is July 31 and Hawaii on July 20. However, a few states required filing in June (Idaho, Virginia, New Hampshire, and Washington; the latter two for business taxes), as well as Puerto Rico, so here's hoping you didn't forget.
If you live in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming, you don't have to worry about state income tax at all.
If you're getting a refund, you should have filed months ago so you could get that money fast. Now, time's up. Read on for everything you need to know to file fast.
Filing doesn't need to be a hassle. Today's tax-prep software painlessly takes you through the steps needed to file a clean, correct return in a timely fashion. The software saves your work as you go, so start immediately and finish when you have all the documents you require. Legally, most tax documents such as W-2s, 1099s, etc., should be mailed with a postmark by Jan. 31, though there are a few exceptions, like 1099-S and 1099-B forms. But it's July. You better have it all by now.
Don't file until you're sure you've got all the forms. Not only does it put a bigger target on you for an audit, it means more paperwork later when you file an amendment (Form 1040-X; you've got three years from the original filing date to file an amendment to get a refund, and 1040-X cannot be e-filed, only snail mailed). Better to file an extension (see below).
E-filing is the way to go. (If you don't believe me, read How to Get a Bigger Refund with Tax Software.) Perhaps best of all, nine out of 10 e-filers receive refunds within 21 days, as opposed to six weeks for paper filers. Even the IRS prefers it.
In 2015, there was a huge spike in refund theft—1.2 million fraudulent returns filed for $7.2 billion. The IRS and states cracked down on tax refund fraud, thus delaying refunds to verify IDs has become the norm, especially for those getting the Earned Income Tax Credit or Additional Child Tax Credit. Fraudsters love these refundable tax credits, since even a low-income return that owes nothing could qualify. The other reason refunds will be late: low staffing at the IRS.
The IRS will only accept one return per Social Security number, so filing early means beating fraudsters to the punch. Getting a rejection on an e-filed return this late in the game is the first sign your ID may be compromised. Fixing that issue can be a true hassle, starting with a fraud report.
All of which means, if it takes longer to get your refund, it may be for a good reason. The IRS fraud filters are more stringent, catching more legit filers in their claws. In 2015, 40 percent of the 4.8 million flagged by the IRS as fraudulent were not. By the end of 2018, fraud was down a full 72 percent, according to the IRS.
In 2018, there was something else to worry about. The IRS issued a warning about fraudsters who deposited tax returns to your account even if you didn't file. Sound great, but then the bad guys tried to trick you into handing the money over to them. It was a phishing+fraud+social engineering scheme, and it could still work. If you receive an erroneous refund, contact your bank and have them return the refund to the IRS, then call the IRS at 800-829-1040 for individuals, or 800-829-4933 for businesses, and explain what happened. You can read a lot more about this in Forbes. You can also read our expert's take on How to Avoid Phishing Scams.
Here's a look at the 2020 list of "Dirty Dozen" top tax scams from the IRS.
In 2015, scam calls from people/bots pretending to be the IRS demanding tax payments were on the rise, persisting into 2018. It is a scam: The IRS will never call you to demand an immediate payment. It certainly won't ask for a credit or debit card number over the phone. The IRS's first point of contact is always the mail, and you have the right to appeal before you pay a dime, even to the IRS. It's all part of the Tax Payer Bill of Rights. If you get such a call, report it on the IRS Impersonation Scam Reporting form, or call 800-366-4484.
Smartphone users should download the Hiya app (free on Android and iOS), which has built-in phone-spam detection specifically targeting such calls. If you report a call to Hiya, it adds any new numbers to the database to help others.
Hopefully you're past worrying about all this because you've already filed. But if that were they case, you wouldn't be reading an article with a headline about last-minute e-filers. So read on for the overview of what you need to know.
Determine the Best Tax Software for You
There are big names and small in online tax preparation software, but this year only Intuit TurboTax Deluxe 2020 takes home the Editors' Choice. The only other software with as high a rating is H&R Block Deluxe 2020.
All range in price from free versions for federal filing to premium packages that include state filing and advanced scenarios. Each offers a variety of ways to claim refunds, provide recommendations to avoid an audit, and offer some form of an accuracy guarantee.
If you need to file on your phone, these are our picks for Best Mobile Tax Apps (TurboTax wins again).
If you're a freelancer, our guide to filing taxes in the gig economy will help you determine the right tax software.
Extensions, Penalties, and When to Pay
If you know you're owed a federal refund, you are allowed to file late. Yeah, even after July 15 this year. That's because your typical punishment for filing late is giving up a percentage of your refund.
In fact, the government would appreciate it if citizens getting a refund did file late. It prefers to collect money. It also likes to keep money, and if you wait long enough—three years—your refund becomes government property.
This does not apply to the states, however. File state taxes on time, whether you're paying or not.
For the Luddites who fear electronic filing, there will likely be a number of USPS offices open until midnight on July 15—and you must have an 11:59:59 p.m. post mark or you're late. Use the USPS.com Locations tool to find the office nearest to you that will be open, but call to make sure.
If you don't file by July 15 (not even an extension), but you owe money, the monetary penalties are 5 percent of any unpaid taxes owed for each month you don't file, up to 25 percent of the total owed. On top of that, you have to deal with the IRS, which is punishment enough. That's just for filing late.
Then there's a penalty for paying late—another 0.5 percent per month. There's no statute of limitations on lateness—the IRS will come after what you owe even in 80 years, if you last that long. The moral is, file even if you can't pay what you owe.
Strangely, the penalty for not filing is a lot worse than the penalty for not paying.
You can always file an extension. Form 4868 ("Application for Automatic Extension of Time to File U.S. Individual Income Tax Return") is part of your e-filing tax software. It also must be filed by July 15, just like a standard tax return. Doing so gives you an extra three months to do the federal paperwork, until October 15, 2020; for states it varies.
There's one problem. If you owe money, getting an extension doesn't mean you get to pay later. You are required to pony up at least 90 percent of what you owe by July 15, 2020. (Remember, that beats paying the 5 percent per month penalty you receive if you don't even file an extension.)
Deductions, If Possible
There's a chance you're going to be among the hundreds of thousands of citizens of the US this year who don't even bother itemizing and claiming any deductions. That's because the standard deduction for most has been increased so much—it's nearly double—that itemizing deductions won't be worth the hassle. You'll be just as, if not more, likely to get a refund without doing the extra work.
Plus, a lot of deductions went away under the so-called Tax Cuts and Jobs Act in 2019, which has radically changed things for tax payers. There are no more deductions for: personal exemptions, SALT deductions, moving expenses, work expenses (until 2025), or even tax preparation fees.
If you are still claiming deductions, here are a couple you can sandwich in at the last minute to help, even though the tax year 2019 is long over.
Until July 15, 2020, because of the tax filing date change, you can contribute to a traditional or Roth IRA and deduct the amount from your income for 2019. You can contribute up to $6,000 or $7,000 if you're over 50. That can save you $2,200 in taxes.
You can still contribute to a Simplified Employee Pension IRA (SEP IRA) and/or Health Savings Account (HSA) for the 2019 calendar year. For the SEP-IRA the limit is $57,000 or 25 percent of your compensation, whichever comes first. For the HSA, don't go over the maximum contribution of $3,550 for individuals or $7,100 for families. You can add $1,000 if you're over age 55.
Need to find more deductions? Try these:
Are you a volunteer? You can't deduct your time or personal expenses like lunch while helping, but you can claim up to 14 cents per mile driven in your own car while traveling for voluntary acts for a nonprofit. Parking and tolls, too. (That's right, you can claim mileage for volunteering, but not for actually paid work.)
If you're in the armed forces and have to move due to a change of station (under orders), you can claim 17 cents per mile driven for moving purposes. Which is actually down from the 20 cents option in 2019.
If you paid directly for glasses or contacts, examinations at any doctor, teeth cleanings, hospital visits, ambulance bills, etc., in calendar year 2019—and those medical expenses all add up to more than 7.5 percent of your adjusted gross income (AGI)—you've got a major deduction on your hands. It takes a lot to get to 7.5 percent, but one year with a serious illness can add up quickly. (In 2020, you'll have to spend 10 percent of your AGI on medical care to deduct it.)
If you did any kind of home improvement for medical reasons—like installing a wheelchair ramp—that's deductible, but again must fall within that 7.5 percent with all the other medical expenses.
Find Your Missing Info
Worried about a missing W-2 or 1099? Get a look at your full IRS transcript—that's a list of all the income and wage information that was reported about you over the year. You'll find it at the IRS page called Welcome to Get Transcript.
You'll need to provide your Social Security number or Individual Tax Identification number (ITIN), date of birth, filing status, and street address for an online transcript that's suitable for printing.
Know Your IP PIN (If Necessary!)
For a select group of citizens—mainly those who may have a compromised Social Security number—the IRS will assign a six-digit Identity Protection personal identification number (IP PIN). It's another extra-governmental identifier that might make privacy advocates apoplectic but helps the IRS in its constant battle against fraud.
Including it provides government accountants extra assurance you are you. If you ever got one, even as part of a pilot program, it's required for all future tax returns. If you can't find your IP PIN (it comes on a CP01A notice; you'll get a new one every year), go to the Get An Identity Protection PIN (IP PIN) page to retrieve it.
If you've never received an IP PIN in your life, consider yourself lucky. But you can always opt in to get one.
Don't Sweat the Audits
A lot of people get stressed about an audit. That's when the IRS comes in and goes over your records to make sure you're not a big ol' tax liar. Tax prep software like TurboTax will provide a rundown of why it believes you're at risk of an audit or not. Audits have declined every year since 2010; As of 2019, it only screened 0.45 percent of individual tax returns, that's half of what it screened a decade ago. That's because of staffing. The IRS has lost 30,000 full-timers due to cuts since 2010. 31 percent more of them will retire by 2025.
Filers who make over $10 million a year are statistically more likely to get inspected, no matter what—6.66 percent of returns on such high-income households get screened. Sorry, Richie Rich.
There might be some random audits, but if you've never been audited before, it's unlikely to happen now if you don't throw any red flags in your filing. The biggest thing is, don't stand out. The IRS is using algorithms just like everyone else to see who in your income bracket is unique, and unique gets noticed, and noticed gets checked. Amending your taxes is another red flag that increases audit risk, so use software to file accurately the first time.
Other ways to get audited, according to Forbes: have off-shore accounts, make incredibly huge charitable deductions, publicly protest paying taxes (and then don't pay!), have a business that's always reporting losses, try to write-off your hobbies, or make a lot of math errors in your returns. That last one isn't a problem if you use tax prep software.
At least one accountant claims a good way to avoid audits is to always file for an extension and submit tax paperwork in the height of summer, because auditors like to vacation, too. But for 2020, filing in the summer is now the norm, so it shouldn't count against you. We hope.