It’s a week after the income tax deadline, and many of you may not have filed. Many of you may have also not paid your taxes in full or a portion of your taxes. There are penalties for both, but don’t go pulling out your hair just yet. First, almost half of Americans owe no federal income taxes because of having a low income or a large amount of deductions. Second, the penalty amount is not even that high (in the beginning, at least). And third, you may have an opportunity for a deadline extension. This article will show you why not to fret if you are late with filing taxes.
Nearly half of Americans owe no federal income taxes in the first place. Exemption from federal income taxes relies on adjusted gross income and the number of dependents or deductions you have. For 2012, a married couple with two children can file joint taxes and owe no federal income taxes if they earned $27,100 and applied the standard deduction of $11,900 and personal exemptions of $3,800 each. (The standard deduction is an amount that can be subtracted from income if an individual is not itemizing deductions.) In my personal case as a single individual, the standard deduction was actually higher than the amount of taxable income I made from 2012, so I owed no federal income taxes from the standard deduction alone! Some income, like disability benefits and foreign income, are non-taxable up to a point. Some people who owe no federal income taxes may even get a refund, thanks to the earned income tax credit! Being eligible for paying no federal income taxes is not just for low-income individuals and families. The wealthy can lower what they owe with a combination of municipal bonds and itemizing deductions through charitable donations.
So, a lot of people do not pay federal income taxes. If you do, however, and you still owe after April 15, the penalties are not large, as long as you paid a good portion of what you owe. It also helps to file because, for some odd reason, the penalty for not paying your taxes and the penalty for not filing your taxes are different! The penalty for filing late is 5 percent of the total amount of unpaid taxes for each month that the tax return is late, but the penalty for not fully paying your federal income taxes is only ½ to 1 percent of the total amount for each month it is late. The statute of limitations on back taxes is three years, and if both the failure-to-file and failure-to-pay penalty occur in the same month, the maximum combined penalty that month will simply be 5 percent. Therefore, the IRS puts more stress on filling out the paperwork than actually paying your taxes. If you owe $1,000 and you did file, you will simply be charged an extra five to ten dollars the first month; in the same scenario without filing, you would be charged an extra fifty dollars the first month! The fees will accrue, so make sure you file or pay off the extra amount within the first three months.
Finally, there is an opportunity for many people to file for an extension. IRS Form 4868 allows individuals a six-month extension for turning in the paperwork. The IRS has a ton of paperwork to sift through in the first four months of the year—mostly because of its own doing—so they and tax professionals actually appreciate those who want to take a little more time to be as accurate as possible. However, Form 4868 needed to be completed by April 15, so this option is no longer available. There are also penalties involved with the form if you do not pay your taxes. Form 4868 means you are asking for an extension on filing; you still have to pay something by April 15! The IRS will waive any penalties if you pay at least 90 percent of what you owe. Of course, because you don’t exactly know what you owe, overpaying is a good idea. Form 4868 explicitly states that “You do not have to explain why you are asking for the extension.” It’s available for everyone. Just make sure next year that you file the form, plus what you think you owe in taxes, before April 15.
When you are making a payment of federal income taxes, make sure to address the check or money order to “United States Treasury,” and when you are mailing it, do not forget to write out “Internal Revenue Service” on the envelope!
He played clarinet for the Marching Tar Heels in 2005 and 2006. He also volunteered for STV, the student-run television station at UNC-Chapel Hill, in the spring of 2010. He shot video, wrote scripts, and acted for “Off the Cuff,” UNC’s longest running sketch comedy show. He has the rare distinction of having lived in a dorm all four years of his undergraduate college career. He was also on Franklin Street on the night of April 4, 2009. His future plans are to pursue a master’s degree in journalism and to one day work for the media as a sports journalist or broadcaster.
Being one of eight children, David realizes finance is an important topic to everyone, regardless of his/her knowledge of the subject. His interests are in personal finance, budgeting, and savings.
In his spare time, David enjoys watching sports and standup comedy, as well as doing crossword puzzles and writing in the first person. He also thoroughly enjoys trivia and, one day, hopes to participate on the game show Jeopardy!, where he will try to break Ken Jennings’ 74-game win streak.