How Does the Federal Individual Income Tax Extension Affect You?

Our own Lynn Mucenski-Keck has been selected as a Forbes contributor and writes guest articles on changes and developments in the federal tax law on a regular basis. The below article discusses how the IRS and New York State’s extension of the 2020 individual income tax filings (Form 1040) may impact individuals.

As many individuals rejoiced to see the Form 1040 due date extended from April 15, 2021, to May 17, 2021, it is important to understand what the extension applies to and whether you will get the relief you expect.

As highlighted above, the IRS extension only applies to 2020 federal income tax filings for individuals. For example, 2020 calendar year US Corporate Income Tax Returns (Form 1120) and US Income Tax Returns for Estates and Trusts (Form 1041) original filing deadline remains April 15, 2021.

The IRS News Release 2021-59 not only extended the filing deadline for the 2020 Form 1040, but also the income tax payments related to the 2020 taxable year.

Individual taxpayers can also postpone federal income tax payments for the 2020 tax year due on April 15, 2021, to May 17, 2021, without penalties and interest, regardless of the amount owed. This postponement applies to individual taxpayers, including individuals who pay self-employment tax. Penalties, interest, and additions to tax will begin to accrue on any remaining unpaid balances as of May 17, 2021. Individual taxpayers will automatically avoid interest and penalties on the taxes paid by May 17.

The good news? Taxpayers can delay filing their 2020 Form 1040 as well as paying any federal income tax payments due with that 2020 federal return until May 17th. The extension will also provide taxpayers additional time to contribute to an Individual Retirement Account (IRA), and thereby decrease their AGI to potentially receive more favorable tax benefits. A taxpayer will be deemed as making an IRA contribution on the last day of the 2020 tax year provided the IRA contribution is made no later than the original due date of the 2020 tax return. Now that the due date is extended to May 17th, additional planning can occur. Pay close attention to IRA contributions, and a reduction to 2020 AGI, if a taxpayer’s AGI is hovering around $160,000 for married filing joint taxpayers ($80,000 for single filers) in order to maximize the ability to receive a 2021 individual recovery rebate.

2021 Estimated Tax Payments are Not Included in the Extension

The bad news? As of now, income tax payments related to the 2021 tax year are excluded from the federal extension. Therefore, individuals that are required to pay federal estimated quarterly tax payments will still be required to make their first quarter payment by April 15, 2021. Cash will still have to go out the door! This will not only affect self-employed individuals, but owners of flow-through entities and S Corporation shareholders as well. Many taxpayers rely on the safe harbor rules for their 1st quarter federal estimated tax payments. The safe harbor allows individuals to avoid underpayment penalties provided they pay in a 25 percent of their prior year tax, or for taxpayers with an AGI above $150,000, a quarter of 110% of the prior year tax. However, if the 2020 tax return is not completed, it may be challenging to calculate the safe harbor.

States May Not Follow the Federal Extension

While Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming do not assess an income tax and therefore do not have an April 15th filing, the other 42 states have filing requirements due for the 2020 taxable year. Without each state officially adopting the extended federal deadline, the original state deadline will remain. As of March 19th, BNA Bloomberg announced Alabama, California, Colorado, Illinois, Kansas, Kentucky, Maine, Missouri, Montana, New York, New Mexico, Pennsylvania, South Carolina, Virginia, West Virginia, and Wisconsin would match the new federal due date of May 17th for individual income tax filings. Even though the 16 states have adopted the extension, close attention should be made to confirm whether 2021 first quarter estimated tax payments for a particular state will still be due on April 15th, 2021.

Twenty-four states, except for Louisiana whose original filing date is not until May 17th, have initial individual filing deadlines prior to May 15th, with the vast majority still indicating April 15th. What does that mean? As of today, individuals across the country will most likely have to file their individual tax forms for state purposes, receiving limited benefit from the federal extension. All tax information will still need to be waded through or provided to your accountant to ensure that the state filing deadline is met. It is possible the only benefit some individuals will receive from the extended deadline will be the delay in paying the remaining 2020 tax due on their federal return.t.

So Where Does That Leave an Individual Taxpayer?

It may go without saying, but individuals expecting a refund should file as soon as possible. The delay in tax refund payouts is real. The IRS had a delayed release of the 2020 Form 1040 form, is prioritizing recovery rebates, and has reduced headcount, all of which lead to slower refund claims. If you need the money, even with the federal extension, don’t wait to file.

As the federal extension has such a narrow scope, only applying to the 2020 Form 1040 and 2020 individual tax payments with most states not yet adopting the extension, many individuals will, unfortunately, find limited impact from the tax deadline extension. Individuals who do not want to file an extension should still be working hard to gather all their tax information and submit it. Good luck!

This article originally appeared on Forbes: click here.

The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We, therefore, make no warranties, expressed or implied, on the services provided hereunder.