It’s time to go through all those ignored stacks, files, boxes, unopened mail, and emails. Wait a minute, when is tax season? Well tax season is here, and it is time to get prepared.
2016 Tax Season Starts January 1st and Ends April 18th, 2016.
Yes, if you noticed the April 18th date as unusual, you are correct. You can thank Emancipation Day for the extra few days to file your tax return. First, what is Emancipation Day and why do we celebrate it?
“Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” -Abraham Lincoln
On April 16th 1862 Abraham Lincoln signed the Compensated Emancipation Act. With this legislation Abraham Lincoln freed more than 3,000 slaves in the District of Columbia. This Act served as a precursor of the Emancipation Proclamation.
You are likely wondering what this has to do with the tax filing deadline. Well, Emancipation Day is an observed holiday in Washington D.C. therefore local government offices are closed. In 2016 April 16th falls on a Saturday, so it is observed on April 15th. Because April 16th and 17th are over the weekend, we are finally left with April 18th as the official tax filing deadline. If Abraham Lincoln wasn’t already your favorite president, he may have just moved up a spot or two for the procrastinators out there.
Now that we know the cool story behind the tax season deadline being delayed, that begs the question of what exactly needs to happen and when to file a tax return on time. This depends on how you file.
Most people choose to e-file their tax return because of the ease and speed. You can file your tax return up until 11:59pm on Monday April 18th in 2016 and it will still be considered on time. For you procrastinators out there take note. Another advantage to submitting your documents online is a much faster turnaround time for any tax refund. Your refund generally will be processed within 21 days of filing through e-file.
Your second option for filing is to mail your paper tax return documents in to the IRS. As long as your tax return is post marked by April 18th, you are considered to have filed your taxes in a timely fashion. There is no requirement that the internal revenue service receive your tax return by the tax filing deadline, just that it be post marked by that date.
There are disadvantages of filing a paper return. Since the IRS must enter all of your information into their system manually. It can delay the processing of your tax return. If mailed, you can expect your tax return to take four to six weeks or more.
What does an extension do? How does this change the tax season and tax filing due dates?
There are several reasons why you might want to delay filing your tax return. The IRS doesn’t impose any penalties or interest as long as you follow their rules. Sometimes you are still waiting on a K-1 or other tax document by the time April rolls around. Maybe we are simply too busy to dedicate the time to filing within the allocated time. There are three ways to file for an extension to delay the filing deadline.
- You can pay for all or a part of your estimated income tax bill and mark that the payment is for an extension using the Direct Pay System.
- You can submit a tax form 4868 electronically through e-file using a home computer or asking your CPA or tax professional to file it on your behalf.
- You can mail in the same 4868 form postmarked by your tax filing deadline with a payment of the estimated taxes you will owe.
Upon filing using one of the above methods, this extends your tax season for another 6 months. That means in 2016 your extension runs through October 17, 2016. The ability to file an extension is great. You may have a major life event that interferes with your time or ability to get your taxes done. A family illness, job loss, wedding, child, or any other major life interruption could all be good reasons to file an extension.
The good news is that as long as you have paid your estimated tax liability before filing the extension, you should not be subject to any taxes or penalties for filing your tax return within the 6 month extension period. That is correct, it doesn’t cost any extra money to file an extension. Plus, as you can see above, it is a simple one page form to request an extension. If you have not paid all if your tax liability and wind up owing money upon filing you tax return with the extension, you likely will be subject to a penalty of .5% of the underpayment amount per month. overall, a pretty mild interest rate of 6% per year.
In fact, over 10 million taxpayers file for extensions every year. You don’t have to explain or justify why you are requesting an extension for your tax filing. The IRS really does not care why you need more time. It is automatically granted with correct requests.
Often taxpayers are concerned that filing for an extension calls undue attention to themselves and may warrant an income tax audit. This is likely the opposite of reality. Your chances of being audited are most likely lower after filing an extension. The IRS has audit quotas and percentages. These are often already met by the time October filers are submitting their tax returns at the end of the extension season. However, the IRS doesn’t tell us any explicit audit statistics based on filing date to keep taxpayers honest.
What documents should I have prepared to file my taxes?
There is a long list of potential documents that should be included in preparing for your income tax filing. We’ll go through the most important documents and items here and what they mean.
W-2: you should collect any W-2 forms that have come from your employers for the year. A W-2 shows your earnings as an employee along with several other details about your taxes withheld, retirement plan contributions, and other important information. For a summary of how to get a copy of your W-2 and the details of the form check here.
1099: A 1099 is a tax form that reports certain types of income for the year that generally must be included in your tax return. The income reported on a 1099 is taxable income, but was not earned by an employee. The interesting thing here, you can work as a contractor and if you earn less than $600 as an independent contractor, that payer doesn’t have to mail you a 1099.
5498: This form is a reporting of any contributions, rollovers, or transfers into a Traditional IRA, Roth IRA, Simple IRA, or SEP IRA. The IRS will keep track of contributions into these accounts as there are contribution limits depending on income and participation in an employer sponsored plan. They also want to track any distributions or even force mandatory distributions as they receive tax revenue in many cases.
K-1: This form is a little unique as it denotes income that has flowed from a business or investment back you to be reported on your personal tax return. Taxation can vary depending on whether the K-1 is issued from a trust, partnership, or corporation. The tax form can report several types of income, from investment income like interest and dividends, to passive income where you don’t materially participate.
Beyond these forms, there are several other items that should be included in your tax return. Below is a checklist of items that would be handy to include as you prepare to file your taxes:
These are a few other income items to make sure and include as income:
- Business income and any business expenses you can take against that income
- If can claim a home office deduction from your above business, you’ll want the square footage of your home, the square footage of the office you work out of, home expenses like utilities and property taxes, and business expenses
- Rental real estate income and expenses
- Unemployment compensations
- Alimony received
- Social security benefits received
- Any IRA or other retirement plan distributions
- Income from the sale of property less any cost selling that property
- Installment sale payments received
- Gambling winnings
Below are some adjustments to your income to help lower your tax liability:
- IRA contributions up to $5,500 per person (or $6,500 if age 50 or older)
- SEP IRA, Keogh, SIMPLE IRA, Solo 401(k), and other pre-tax retirement contributions
- Student loan interest
- Alimony paid
- Moving Expenses
- HSA contributions
- Educator Expenses
- 1/2 of self employment taxes
You can also deduct these items below on your Schedule A as an itemized deduction:
- Home mortgage interest and any points you paid on the purchase or refinance
- Property taxes
- Charitable gifts and donations including cash, donated property, and miles driven
- Carryover charitable donations from a prior year
- State and local income taxes or sales taxes
- Mortgage insurance of PMI premiums
- Medical and dental expenses (subject to 10% of AGI Floor)
- Gambling losses (subject to 2% of AGI floor)
- Casualty and theft losses (subject to 2% of AGI Floor)
- Unreimbursed employee business expenses (subject to 2% of AGI floor)
- Tax preparation fees and investment advisor fees (subject to 2% of AGI floor)
- Investment interest expense like margin interest (deductible up to investment earnings)
You may have many of the above, or some of them you may not have been aware of at all. Tax season means collecting all of these that fit your situation and anything else that applies. Once you have everything in one place, it is time to try your hand at filing taxes ourselves. Or you could purchase software to help with the task, walk into a retail franchise tax service, or set an appointment with a CPA operating a small tax business.
With any luck, the tax season in 2016 will mean a large refund and learning a few tips and income tax deductions that will help lower your tax liability for next year. Please leave us your comments below, we’d love to hear your stories of the fat tax refund and what you decide to do with the money. If this post was helpful, share and help your friends with their taxes on Facebook and Twitter.