COVID-19 may have bought people a few more months in which to file their tax returns, but that extra time is up soon. July 15 marks the IRS’s deadline for filing and paying federal income tax, extended from the usual April 15 deadline due to the pandemic.
Those who need more time to file a tax return can file a request for an extension, also due on July 15.
In an interview with the News-Press, Los Angeles-based H&R Block master tax advisor Aaron Martinez said whether or not a taxpayer chooses to file or request an extension, it is most important that they “do something” in order to avoid late filing penalties. Even if a taxpayer files a request for an extension, those who have a balance due are still required to pay at least 90 percent of that balance by Wednesday, according to Mr. Martinez.
Since COVID-19 forced many businesses to shut down in the spring, many people have gone on unemployment, which is taxable income. Mr. Martinez remarked that those who aren’t having taxes withheld from unemployment might have a balance to pay next year. Because of this, those receiving unemployment may want to consult with a tax professional for a mid-year check-in to discuss how their life-changing circumstances amid the pandemic could impact the taxes they’ll owe for the year 2020.
“You want to look at that now so you don’t get the surprise next year when you go to file,” Mr. Martinez said.
On Wednesday, individuals who are self-employed or private contractors will need to make an estimated payment on how much they will owe in taxes for the year 2020. To determine what dollar amount should be paid as an estimated payment, Mr. Martinez suggested going onto the IRS website is the best way to do it. Whatever the exact dollar amount owed, Mr. Martinez said self-employed taxpayers should “try to get within 90 percent” of what they owe.
When filing, those who are self-employed and work from home can make a home office deduction.
Usually, deductions for charitable donations need to be itemized, but under the CARES Act that was passed to alleviate the economic impacts of COVID-19, deductions for donations of up to $300 do not have to be itemized. Mr. Martinez remarked that this is one of a few deductions that low-income individuals and families should look out for to get a greater refund.
Though somewhat separate from the looming tax deadline, the tax advisor also mentioned the CARES Act’s 401(k) financial hardship withdrawal as something else low-income individuals and families should be aware of. Under normal circumstances, a person under 59 ½ years of age wouldn’t be able to withdraw from their 401(k) without incurring an early distribution penalty. However, due to the financial impacts of COVID-19, those under 59 ½ years old won’t have to pay an early distribution penalty for taking money out of their retirement account. 401(k) distributions are still taxable income, but payments can be spread over a three-year period.
As for the earned income tax credit, Mr. Martinez said it is not only “one of the best reasons to file” for low-income families, but one that many low-income families are unaware of. Many low-income families wind up not owing any taxes, but they forget that filing for the earned income tax credit can get them a refund. Recalling how a single mother once got a $3,000 refund from the State of California, Mr. Martinez stressed that the earned income tax credit can be of great help to those who file for it.
“We’re not talking pocket change, these credits can be quite valuable,” he said.