Tax deadline day is almost here
The April tax deadline stirs up mostly negative emotions with accountants and most taxpayers, but what is it really?
It is the day to file an extension and write a check for 100% of your prior year tax burden, and 25% of your current year taxes.
There can be benefits to getting your taxes filed by the deadline:
- Deadline day is the first day to get the statute of limitations running with your taxes paid and filed.
- It is a good feeling to get your taxes behind you as soon as possible.
- You get to tell other people that your taxes were done back in February. People love that.
But many people with complex tax situations or procrastinating tendencies tend to extend.
- They have to wait for K-1s coming from partnerships
- They are generally disorganized/avoidant of the matter in general
- They would rather wait until October to pay because they don’t have the money, or would rather use the money to finance something else.
My old boss used to say, “The IRS is the lender of last resort. I’d rather borrow from my Grandmother.” I never met his grandmother, but he means to say that the IRS is generally not a great lending counterparty.
You can owe the IRS money until your extended tax deadline and generally make out ok. You will pay late payment penalties (about .5% a month on what you owe) and interest (currently 3%). The IRS doesn’t get punitive until you pass the extended filing date.
At that point you are best to have filed, or they start charging aggressive fees on what you owe (5% monthly up to 25%). The good news is if you are paid in full, they don’t do much for a while, but they can still get crabby about it.
With that all being said – what is the best way to calculate your estimated tax burden?
What we do with our clients is prepare their return with the best information we can find. We focus on trying to get material numbers correct. Material numbers are items such as DEFINITION. Those are the items that will really drive the tax burden for the client.
Outside of that, we use best estimates where we cannot find concrete numbers. Those will be numbers from the prior year, estimates and guidance from their investment partners, or best guesses that our clients give us.
All of this is to build a best estimate of what we think our client will owe, and how to safe harbor the current tax year.