We’re a little over a week removed from the tax filing deadline for your 2021 tax returns. So unless you’ve filed for an extension, your 2021 tax return should be filed to the IRS by now. The tax code is a complicated laundry list of things that makes people frustrated beyond belief.
We field plenty of questions every year at Mullooly Asset Management from folks. They wonder if they need to adjust their tax withholdings, what capital gains tax rates are for the current year, how to figure out how much they pay in taxes each year, and more. And while we’re not tax professionals, we do our best to help those clients out before pointing them in the right direction to an accountant or CPA.
One question in particular stuck out to me this year however, so I wanted to take a minute to break it down. (The names and numbers in this example have been changed.)
The question came up:
If I can’t afford to pay my tax bill in 2021, would it be better to file and not pay, or simply not file at all?
On the surface, it seems like a fair question. However, the outcome can be costly for folks if they choose poorly. Let me explain.
When it comes to a case of failure to pay: the penalty involved is 0.5% per month the tax is unpaid with a maximum of 25%.
When it comes to a case of failure to file: the penalty involved is 5% of the tax due each month with a maximum of 25%.
Let’s put that into dollars and cents terms for you:
Failure To Pay Your Tax Bill
The taxpayer (let’s call her Susan) owes $10,000 for the current year. Susan does NOT have the money to pay the IRS. If Susan were to file her return to the IRS by April 15th and send NO money, the IRS will send her a tax bill to collect the $10,000 that she owes. If Susan is finally able to pay her tax bill in August (4 months late), the bill would be approximately $10,200. She pays her original $10,000 tax bill PLUS $200 in late-payment fees (4 months x 0.5% = 2%) 2% of $10,000 is $200. Not TOO bad.
Failure to File Your Tax Return
Susan owes that same $10,000, but instead of filing her tax return and not paying she chooses not to file at all until she has the money. Her total tax bill would end up being $12,000. She would still need to pay her original $10,000 bill, but the penalty due would be $2,000 instead of $200. (5% x 4 months = 20%) 20% of $10,000 is $2,000.
Moral of the story:
Always file your tax return. Even if you don’t have the money right now to pay your tax bill, file your return anyway. Hopefully none of you reading this post were in a situation like Susan this year. But if you were, now you know better for 2022! If you have any questions about anything discussed here today, feel free to follow this link over the Mullooly Asset Management website. You can schedule a meeting with our team of advisors. We’d be happy to discuss anything you have in mind.