This article was last updated on September 24
The title of this article was based on the following email I received a couple of weeks ago. It’s a topic that a number of people can relate to around tax time, so I also published my answer below.
“Last year my wife was pregnant and took 4 months of work and she was getting disability. She then got back to work and two months later her entire group was laid off as part a downsizing move when her firm lost a major contract. She got a few months severance and since then has been on unemployment. I continued to work but early this year I also lost my job. When I did my taxes via turbo-tax, it showed that I will owe $4,310 in taxes because my wife or I did not withhold sufficient funds last year (I did not realize unemployment income is taxable). So my question is, can I delay paying these taxes by filing an extension to October – when I hopefully will have a job and some more money. Thanks, [Javier]”
Javier, sorry to hear about your situation. With both of you unemployed and a new baby in the house, life cannot be easy and I hope you find a job soon. I am going to answer your question in 3 parts.
Part 1 : First and most importantly, requesting an extension of time to file is NOT an extension of time to pay taxes owed. In fact if you do not pay taxes by the April 15 filing deadline, you will start incurring interest and penalties on any outstanding amounts the IRS calculates you owe – which may be more than the $4,310 because the IRS may not know about your child and overall financial situation. It’s better to prepare and file a tax return or tax extension even if you can’t pay your entire tax bill, since the penalties are far higher if you don’t file anything. Also don’t forget , requesting a federal extension does not automatically include extending the deadline for your state income tax return and any taxes payable. You need to request your state income tax extension separately with the tax department of your state.
Part 2 : The best way to request an extension of time to file your federal tax return is to go through the IRS website or use Form 9465, Installment Agreement Request. If you owe more than $50,000, you will also need to complete Form 433-F, Collection Information Statement. You can also use tax software like TurboTax (which may be easier since that is where you got your taxes liability estimate) or go via your tax professional to electronically file the request with the IRS. If you wish to file electronically, be sure to have a copy of last year’s tax return. You will be asked to provide the adjusted gross income (AGI) from the return for taxpayer verification.
Part 3 : Because it appears you don’t have enough funds to pay your estimated taxes due, I suggest you enroll in an IRS installment plan. In fact, during the last year the IRS reported that it had set up installment agreements for nearly 3 million tax payer returns. Using the IRS website it should take less than 10 minutes to figure out if you are eligible for an installment plan. You even get to pick your monthly payment amount and the day it will be due. Tax payers in good standing who can prove that they do not have the funds to pay their taxes will normally always get automatically approved when the total installment plan amount is less than $10,000.
You can also call the IRS at 1-800-829-1040 to discuss your payment options if you do not like the online option. Installment agreements are not free with a one-time fee of $105 for setting up the installment plan, or $52 if you have the payments debited directly from your bank account. The interest rate you will own on your installment plan loan fluctuates, based on the amount you owe. See more on IRS website for installment plan details.
Hopefully the above will help you figure out the next steps to take with your tax situation.