It’s April 14. Do you know where your tax returns are?
If your answer is “What tax returns?” then you’re in for a rude awakening.
With Tax Day less than 24 hours away, you’ve got to figure out what you can (and can’t) realistically get done in order to file your return on time—or at least avoid penalties.
Perhaps your first inclination is to beg for last-minute tax tips via social media.
Maybe your second is to knock on every CPA’s door within a five-mile radius, hoping someone will take pity on you.
You’re in the shower getting ready for your workday. But there’s a nagging feeling you’ve had since your alarm went off … like you’re forgetting something.
Then it hits you—your taxes are due tomorrow! The calendar alert you set two weeks ago to file has mysteriously disappeared from your smartphone.
You have two possible options: Fake your best “I have a cold” voice, call in sick, and then plant yourself in front of the computer to sort through your paperwork and e-file. Or file an extension—something you’ve never done before.
You stumble into the living room and rifle through your file cabinet, hoping that you remembered to compile all of your tax documents in one folder.
Maybe you can get this done today …
You’re not getting this done today.
For starters, your W-2 isn’t where you remembered putting it. You think you sold stock last December. Plus, you have itemized deductions you need to track down records for, like your mortgage interest, business travel and charitable donations—to name a few.
You text your accountant friend asking what to do. He texts back, “File an extension!”
Good idea. An extension will give you six more months to get your return ready. “That eliminates the failure-to-file penalty,” says Steven J. Weil, an enrolled agent and president of RMS Accounting in Fort Lauderdale, Fla.
And the penalty for not filing is steep: According to the I.R.S., You’ll shell out 5% of the unpaid taxes for every month—or part of the month—that the return is late, up to 25% of the unpaid amount.
But aside from saving money, filing an extension may save you some grief later—particularly since “last-minute tax filers tend to make mistakes in rushing to complete returns,” says Jeffrey Sklar, a CPA and managing partner of Sklar, Heyman, Hirshfield & Kantor in Bellmore, N.Y.
“If we, as professionals who are licensed and certified, don’t rush to do it, nobody should rush to do it,” Sklar says. “If you file the extension, you can take your time and double-check the numbers.”
And, as Weil points out, it can be much easier to file an extension now and prepare your return correctly than to file an amended return later to account for the things you overlooked in a panic.
On your coffee break at work, you Google “file a tax extension,” and up comes the I.R.S. site, as well as a result for TurboTax.
This brings up a whole other question: Should you e-file your taxes on your own, use third-party software or get an accountant?
Now you Google “Do I need an accountant?” and up pops LearnVest’s quiz on the subject. The results suggest getting an accountant because you have a mortgage and investments. So you fire off some emails to friends asking for recommendations for tax preparers.
What?! You have to pay by tomorrow? Isn’t this why you’re filing for an extension in the first place? This is (bad) news.
You look on the I.R.S. website for guidance as to what happens if you don’t pay. Turns out the failure-to-pay penalty is 1/2 of 1% of your unpaid taxes for each month (or part of a month) that you haven’t paid, up to 25% of the taxes owed.
This isn’t the end of the world. If you owe $2,000, this comes out to $10 per month—but you’d rather not pay any penalty.
You’ll have to figure out how much you owe after work.
By now, three of your friends have gotten back to you with recommendations for tax preparers. But how to choose?
Consider taking the recommendation of the friend whose financial situation is closest to yours. “You need to know that the person they’re referring you to deals with tax situations much like your own,” Weil says.
So you rule out the friend who owns her own business and the couple with kids—and go with the recommendation from the friend who has a full-time job and owns his own home, just like you do.
But that’s not where the decision-making stops.
“You need to interview a tax professional to see if this is someone you’ll be able to relate to,” Weil says. “It’s important that you’re able to ask questions and get answers that you can understand.”
So you call up the tax preparer, and luckily, she has time to chat. She answers all of your questions, and you make an appointment for next week. In the meantime, she shoots over some questions that will help you figure out how much you might owe so you can pay your tax bill with your extension filing.
“It sounds more complex than it is, but it’s generally a simple process,” Sklar says. “I tell clients to look at the prior year’s tax return—that’s always a good barometer. If the numbers haven’t changed, and you have a W-2 that tells you how much you’ve withheld, you can get a good sense of whether you’ll owe money or get a refund.”
You’re home from work, and after heating up last night’s leftovers, you (calmly now) track down your 2014 tax paperwork—luckily, you can download most of the forms you can’t find from your bank and brokerage online.
You can’t find a paper copy of 2013′s returns. But you remember that you can download a transcript—essentially a copy of most of the line items on your return—through the I.R.S. website.
O.K., now you’re ready to look through the accountant’s questions. Yes, you sold some stock this year that you’d held for a few years. You look at your brokerage statement for your capital gains, and multiply them by 15% (the long-term capital gains tax rate for your bracket, according to the I.R.S.’ 2014 rates) for a rough estimate of what you owe.
You didn’t buy or sell any real estate, get a big bonus, get married, have kids or go into business for yourself. So your tax situation is pretty much the same as last year, except for the capital gains tax.
Next, you look at how much you owed last year in taxes—and realize you forgot about the big $2,000 bill you paid. You totally meant to increase your withholdings afterward, but never got around to it.
That, with your capital gains, comes out to … $2,700.
To be sure, you use the I.R.S.’ calculator to estimate your taxes, add the capital gains, and get the same number—which is more than you have in your savings account!
Now you’re in a panic again. Can you get an I.R.S. payment plan, like your friend did last year?
“You can’t set up a payment plan until you file the return,” Weil says. “You don’t officially owe the money until the I.R.S. has processed it.”
But not being able to foot the whole bill is not quite as bad as it seems. “The failure-to-pay penalty is based on how much you’re short,” Weil says. So if you owe $2,700 but can only pay $2,400, you’ll only owe failure-to-pay fees on $300.
Even so, you’d probably prefer to sidestep the fees altogether. When you file for the extension, you could pay what you can in cash and put the rest on your credit card, knowing you’ll be able to pay it off once your next paycheck hits.
Even though you’re exhausted, you decide it’s probably a good idea to take care of some tasks you’ve been putting off. You download the W-4 form so you’ll remember to increase your withholdings—and file it with human resources tomorrow. And while you’re at it, you put a reminder on your calendar to also research certified financial planners in your area, so you can review your whole financial picture with a pro.
Before heading to bed, you put all the tax paperwork you’ve gathered into one file so it’ll be ready for your appointment next week with your accountant—you want her to be able to work quickly so she charges you less overall.
“The key to saving money is being organized,” Weil says. “We don’t necessarily need you to fill out the tax organizer provided by the firm—just walking in and saying ‘These are my mortgage interest statements, here are my real estate taxes, here’s my W-2s, here’s the statement from my brokerage firm’ may be enough.”
Now it’s time to face plant on your bed, happy that you survived your mini tax emergency. And for the first time in a long while, you’re no longer dreading April 15.
RELATED: 10 Questions for … a Tax Preparer
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. Unless specifically identified as such, the individuals interviewed or quoted in this piece are neither clients, employees nor affiliates of LearnVest Planning Services, and the views expressed are their own. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.