Last week, my friend Jane asked me to weigh in on a tricky issue. She is an elementary school teacher and has been ready to file her taxes since February, but her husband Mark is a small business owner who won’t be ready to file before April 18, 2017 (we get 3 extra days to file in 2017 because the 15th is a Saturday). Jane has always filed her taxes on time, and she’s anxious to figure out what to do. We worked together to investigate her options, and we wanted to share them with you in case you find yourself in the same position.
Option 1: Request an Extension
If you and your spouse plan on filing Married Filing Jointly, you’ll want to jointly request an extension until October 18, 2017, if you can’t make the April 18th deadline.
The IRS understands that there are many legitimate reasons why taxpayers need more time to file and that’s why they have created an easy to use process for requesting extensions. In fact, nearly 10 million taxpayers are expected to file for an automatic extension this year. The IRS does not require you to state a reason for requesting an extension and one extension per year is granted automatically.
To avoid the failure to file penalty, you will need to request an extension by April 18, 2017, by using federal form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. Alternatively, you can file for an extension online using FreeFile on IRS.gov.
To file an extension, you’ll need the following information:
- Your name (and your spouse’s name if you’re filing jointly) and address;
- Your (and your spouse’s) Social Security Number
- An estimate of your total expected tax liability for 2016
- The dollar amount that you have already paid in 2016 (including withholding and estimated payments)
- The amount you’re paying with your request for an extension
With a joint return, both spouses are responsible for the total tax. So if you file for an extension, you and your spouse will have to pay a late payment penalty on any amount that’s due. According to the IRS, for 2016 taxes, the late payment penalty is usually 0.5% of any tax not paid by April 18, 2017, for each month or part of a month the tax is unpaid. This may be in addition to any penalties that result from not making estimated tax payments during the tax year.
For those of you who receive a W2, more likely than not you will have already paid your federal tax liability through your withholdings. However, individuals who are self-employed or have investment income may have an outstanding tax liability. Taxes owed that are not paid in full by April 18th will accrue interest and penalties until the time at which they are paid in full.
In Jane’s case, even though her employer has withheld her federal taxes all year long, the fact that her husband has not paid some of his estimated taxes for parts of 2016 will mean that his failure to pay will result in a late payment penalty.
Requesting an extension allows you more time to plan and leaves all of the options on the table. If you and your spouse request an extension, you can decide at a later time whether to finalize your taxes using a tax status of married filing jointly or married filing separately. There is no real downside to filing an extension.
Option 2: File Married Filing Separately
If you are concerned your spouse is not going to ever be ready to file or may not file at all, you can file on your own using the Married Filing Separately tax status.
Most tax preparers do not recommend filing using the married filing separately status because the tax liability is generally higher (you will pay more to the government), and this tax filing status does not allow you to use some of the deductions and credits such as the earned income credit, child tax credit, student loan interest deduction, or the Lifetime Learning Credits.
The other complication is that if you file Married Filing Separately, you must choose the same method of recording deductions as your spouse (itemization or taking the standard deduction). While a small business owner or someone who has had large medical bills may benefit from itemizing deductions, a teacher may have less deductions to itemize than the standard deduction (for 2016 the standard deduction for married filing separately is $6,300).
However, one of the biggest reasons that spouses elect to file separately is because one person is concerned he or her spouse will either file a false tax return or never file. If you choose the married filing separately tax status, you can get protection from audits and prosecution, but you need to remember that you are still 100% liable for any unpaid taxes, regardless of who earned the income, falsified his or her tax return, or didn’t file.
If you are very concerned that the reason your spouse is not ready to file taxes is due to something nefarious rather than a legitimate reason, then filing married filing separately could be a good strategy. In most cases, you will be able to amend your filing status to married filing jointly any time within 3 years from the due date of the separate return or returns.
Option 3: What to do if you miss the deadline (April 18, 2017) to file and to request an extension?
Every year people miss the deadline to file taxes and the deadline to request an extension. If you have missed the deadline, you may be charged a late filing penalty unless you qualify for a special exception.
The IRS understands that sometimes the failure to file your taxes is due to circumstances outside of your control such as the death of a loved one, serious illness, divorce, or unemployment. Under those circumstances, you can request an extension or waiver of the late filing penalty from the IRS.
Additionally, if you’re getting a refund from the IRS, you won’t be charged a late filing penalty. The IRS actually gives you 3 years (until 2020) to collect your refund. You won’t earn interest on your refund, though.
However, if you neither filed nor requested an extension by April 17th, 2017, and you owe additional tax, you should file your return ASAP, even if you can’t pay all of your taxes owed.
Tax professionals recommended that you file as soon as possible because the late-filing penalty is 5% of the additional taxes owed amount for every month your return is late, up to a maximum of 25%. Even if you can’t pay your entire tax liability, you should file and pay as much as you can towards the obligation.
Taxpayers who fail to file will most likely be contacted by the IRS reminding them of the missing return, especially if they receive a W-2 or Form 1099, because these forms are reported to the IRS by employers. The IRS views failure to file as a serious offense, which may be punishable by one year in jail and a fine of $10,000 per year.
If you’re worried like my friend Jane that your spouse is not going to be ready to file in April (or October), you should either (1) request an extension, (2) file married filing separately, or (3) if you both miss the filing deadline and the request for extension deadline, you should file as soon as possible to avoid additional penalties.