“April is the cruellest month,” famously wrote the poet T.S. Eliot. If you haven’t yet filed your federal tax return, it can certainly feel that way as the IRS filing deadline looms (April 15, 2019, for most taxpayers). Adjusting to the new Form 1040 and the numerous changes under the Tax Cuts & Jobs Act has made this a very challenging tax season. (See my Forbes.com blog commentary on shifts in the reporting of capital gains tax and the alternative minimum tax.)
Whether you use an accountant or an online program to prepare your tax return, you may decide you need an extension of the filing date. Fortunately, the process for getting a filing extension is easy. However, you can make mistakes that lead to IRS penalties.
Many issues can complicate your tax return, particularly this year, such as the new qualified business income deduction. In any tax season, the recognition of income from stock compensation and from sales of the related shares can complicate your return. Examples include extra taxes triggered from a stock option exercise, ESPP sale, or the vesting of restricted stock units.
How To Get An Extension And Not Penalties
You can get an extension of the federal filing deadline by up to six months. No explanation or signature is needed. You can request an extension in any of three traditional ways: on IRS Form 4868, through a paid tax preparer, or via tax-return software.
It’s vital to understand that an extension of your tax-return deadline applies only to the filing of your return, not to the tax itself, which you must still pay by the original IRS filing deadline. Therefore, if you get an extension you must accurately estimate how much tax you must pay no later than April 15. By paying (or having paid through withholding and estimated taxes) 100%, you avoid interest and penalties. If you can’t manage that, you can still avoid the penalty by paying 90%. For any additional taxes owed when you eventually file, you will have to pay interest on the unpaid amount going back to the original April due date.
The penalty for failing to file is generally more costly than the penalty for failing to pay. For more details on extensions to file and on the penalties for the late payment of taxes, see the FAQ on this topic at myStockOptions.com, a website on all types of stock compensation. If your state has its own income tax (most do), it has its own procedures, rules, deadlines, and penalties for filing an extension and for estimated taxes (discussed below).
Looking Ahead: 2019 Income And Estimated Taxes
When your federal and state tax returns are done and you’re ready to move on with your life, you want to make projections of your income in 2019. You should hurry with this, as the first quarter estimated tax payment is due the same day as your Form 1040 tax return!
Now that you have experienced the impact of tax changes under the Tax Cuts & Jobs Act, whether it be the loss of personal exemptions, the larger standard deduction, or the limit on your property tax deduction, you can make adjustments on your Form W-4 for withholding. IRS Commissioner Chuck Rettig urges employees “to check their withholding again this year to make sure they are having the right amount of tax withheld for 2019.”
If you expect additional income in 2019 that will not be covered from regular withholding, such as supplemental wage income (e.g. income from a big cash bonus, RSU vesting, or stock option exercise after an IPO) you want to evaluate the need to make estimated tax payments, or at least see whether you can adjust your salary withholding. To avoid penalties, be sure you pay the IRS either 90% of your expected 2019 tax total or 100% of last year’s taxes, although it’s 110% for adjusted gross incomes over $150,000. (For 2018 taxes, the IRS lowered the 90% threshold to 80%: see IRS Notice 2019-25.)
Penalties are calculated on a quarterly basis, so you must make estimated tax payments in the quarter when you earned the income. Details on estimated taxes, including a worksheet and all the due dates, are covered in the instructions for IRS Form 1040-ES. If you have stock compensation, see the FAQs on estimated taxes at myStockOptions.com.