My friend Jane asked me to comment on a difficult situation last week. She is an elementary school teacher who has been preparing to file her taxes since February, but her husband Mark is a small company owner who will not be able to do so until April 18, 2017 (we have three more days to file in 2017 since the 15th is a Saturday). Jane has always paid her taxes on time, and she is eager to find out what to do this year. We collaborated to research her alternatives, and we wanted to share them with you in case you find yourself in a similar situation.
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Option 1: Ask for an Extension
If you and your spouse want to file Married Filing Jointly, you should seek an extension until October 18, 2017, if you are unable to meet the April 18th deadline.
The IRS recognizes that there are several genuine reasons why taxpayers want more time to file, which is why they have developed an easy-to-use mechanism for obtaining extensions. This year, roughly ten million taxpayers are likely to apply for an automatic extension. The IRS does not need a basis for seeking an extension, and one extension is provided automatically each year.
To avoid the penalty for failing to file, you must obtain an extension by April 18, 2017, using federal form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Alternatively, you may apply for an extension online at IRS.gov using FreeFile.
You will need the following information to register an extension:
Your name (and the name of your spouse if you are filing jointly) and address;
Your Social Security Number (and that of your spouse)
Estimated total estimated tax obligation for 2016.
The total amount you paid in 2016 (including withholding and projected payments)
The sum you are paying in conjunction with your request for an extension
A combined return requires both couples to pay the whole tax. If you request for an extension, you and your spouse will be subject to a late payment penalty on any amount owed. According to the IRS, the late payment penalty for 2016 taxes is typically 0.5% of any tax not paid by April 18, 2017, for each month or part of a month the tax is owed. This might be in addition to any fines imposed for failing to make anticipated tax payments throughout the tax year.
Those of you who get a W2 will have most likely already paid your federal tax obligation via withholdings. Individuals who are self-employed or have investment income, on the other hand, may have an unpaid tax debt. Taxes outstanding that are not paid in full by April 18th will be subject to interest and penalties until they are paid in full.
In Jane’s situation, even though her company withheld her federal taxes throughout the year, her husband’s inability to pay some of his anticipated taxes for sections of 2016 will result in a late payment penalty.
Requesting an extension gives you additional time to prepare and leaves all alternatives open. If you and your spouse seek an extension, you may subsequently decide whether to file your taxes as married filing jointly or married filing separately. Filing an extension has no practical disadvantages.
Option 2: Separately file married filings
If you are afraid that your spouse will not be ready to file or will not file at all, you may file on your own utilizing the Married Filing Separately tax status.
Most tax preparers do not recommend filing as married filing separately because the tax liability is generally higher (you will owe more to the government) and this tax filing status does not allow you to take advantage of certain deductions and credits, such as the earned income credit, child tax credit, student loan interest deduction, or Lifetime Learning Credits.
Another complexity is that if you file Married Filing Separately, you must utilize the same method of recording deductions as your spouse (itemization vs. standard deduction). While itemizing deductions may assist a small company owner or someone who has had substantial medical costs, a teacher may have less deductions to itemize than the standard deduction (the standard deduction for married filing separately in 2016 is $6,300).
However, one of the most common reasons why couples choose to file separately is because one individual is apprehensive that his or her spouse would either submit a fake tax return or will not file at all. If you select the married filing separately tax status, you may be shielded from audits and prosecution, but keep in mind that you are still 100% accountable for any unpaid taxes, regardless of who produced the money, faked his or her tax return, or failed to file.
If you are afraid that your spouse’s failure to pay taxes is the result of anything malicious rather than a valid cause, filing married filing separately may be a suitable solution. In most circumstances, you may change your filing status to married filing jointly at any time within three years of the due date of your separate return or returns.
Option 3: What should you do if you miss the deadline to submit and request an extension (April 18, 2017)?
Every year, many miss the deadlines for filing taxes and requesting extensions. You may be assessed a late filing penalty if you miss the deadline, unless you qualify for a special exemption.
The IRS acknowledges that failing to submit your taxes may be caused by circumstances beyond your control, such as the loss of a loved one, major illness, divorce, or unemployment. In some cases, you may ask the IRS for an extension or waiver of the late filing penalty.
Furthermore, if you get an IRS refund, you will not be penalized for late filing. The IRS allows you three years (until 2020) to claim your refund. However, you will not receive interest on your return.
However, if you did not file or request an extension by April 17th, 2017, and you owe more tax, you should submit your return as soon as possible, even if you are unable to pay all of your taxes.
Tax specialists advise you to submit as soon as possible since the late-filing penalty is 5% of the extra taxes payable every month your return is late, up to a maximum of 25%. Even if you are unable to pay your whole tax bill, you should file and pay as much as you can.
Taxpayers who fail to file will very certainly be contacted by the IRS, particularly if they get a W-2 or Form 1099, since these documents are reported to the IRS by employers. Failure to file is a severe violation that may result in a year in prison and a $10,000 fine every year, according to the IRS.
Conclusion
If you are worried, like my friend Jane, that your spouse will not be ready to file in April (or October), you should either (1) request an extension, (2) file married filing separately, or (3) file as soon as possible to avoid additional penalties if you miss both the filing and the request for extension deadlines.
