Need an Extension?
What a crazy tax season it has been with all the tax law changes. We totally understand if you need an extra six month to get everything together (I know I do). While the standard six-month tax extension allows you to file your tax return after the usual deadline, if you owe taxes, you have to pay them on time to avoid penalties. That means that if you don't pay your tax balance by the filing deadline (April 15), you'll get hit with penalty and interest.
Even if you can't pay it all immediately, pay as much as you can. Penalty and interest are based on the amount you owe and how long you owe it. Late payment penalties are calculated at 0.5% of the unpaid tax balance per month. The maximum you can be charged in late payment penalties is 25% of the unpaid tax.
For example, if your tax balance is $2,000:
Penalty per month = $2,000 x 0.5% = $10
Total possible late payment penalty = $2,000 x 25% = $500
If you were out of the country on tax day, there is a two-month extension that allows you to hold off paying taxes without penalty, but you will still be assessed interest as of the day after the tax filing deadline.
Interest on unpaid tax compounds daily from the original due date of the return until the date you pay in full. The rate is calculated as the federal short-term interest rate, currently .81% plus 3%. Interest is applied daily, so for each day you're late, you'll owe 0.0082% of the balance.
So, if you owe $2,000 and don't pay when you file your extension, you'll pay:
.81% + 3% = 3.81% annual interest
3.81% annual interest divided by 365 days = .01%
Penalty per day: $2,000 x 0.01% = $0.20
Note that compounding interest results in a daily recalculation of the principal amount plus accrued interest.
Don't shoot the messenger! Let us know if you need help.
--The Walls Financial Team