Mark Kohler explains how much to send with a tax extension to avoid penalties. The filing penalty is 5% monthly, but the underpayment penalty is only 0.5% monthly plus interest, making an extension much safer than missing the deadline. He gives five methods to estimate your payment, from matching last year's tax to calculating your effective rate on new income.
Chapters
It's okay to extend. It's actually strategic to extend. But does that mean you have an extension to pay? It does not. Now we need to talk about some strategies of. Okay, I'm going to extend. Guys, what do I need to send in now? How much to send in now? I've got an article on this. I'll have it down in the description. You can also go to markjkuller.com and under the blog, just type in extension. And I've got five different guidelines of how much money you might want to send in. Now you may say, why do you have five different guidelines on how much to send in? Because if you knew how much you owed, then you'd send in that amount. But a lot of times you're filing an extension because you're like, I don't know how much I owe. So you kind of gotta have some guesstimate type strategies. Whatever you do owe and don't send in with your extension is only half a percent per month. See, that's the 10 times point. It's 5% per month for not filing an extension. It's only half a percent per month for the amount you owe. If you don't owe, it's funny, they're like, okay, if you owe us, it's only a half a percent per month plus 6% interest, the penalty plus the interest at the end of the day, that's, that's less than a credit card. 6% per annum and a half percent per month. So it's not the end of the world to owe is that you don't
want to, but it's not the end of the world.
No, no. Guideline number one, send in 100% of what you owe. For you engineers out there that have kind of figured out what you owe, that's for you. But for the rest of us, we're going to go back to those other options. A lot of people will do a draft return you might just pay 50 bucks for turbo, fill out your return, kind of come up with what you you owe and maybe go 110% of that. You know, just add a little cushion. That's guideline number one and that is doing a mock return.
Yeah.
Guideline number two is send in the same amount you owed last year.
Yeah. If your income was the same, same situation dependence type thing, you know, look at what you owed last year and try to get in that same amount. So in general, you're going to be online, the tax laws change a little bit. Obviously your income could fluctuate 10, five, you know, but if you had a significant change, obviously that's not going to work, but start there first. Yeah, a lot of people are going to have pretty consistent income, even those
that are self employed. What Matt just said is guideline number two, send in the same amount of what you owed last year when you send in your return. See, for example, you may say, Well, I owed 10 grand last year, but I had withholdings of eight, so I only sent in two grand. What we're saying is send in the same two grand this year if your income is approximately the same and you had approximately the same withholdings. See what I'm saying? So look at your last year's return and how much you sent in at the very end and do the same thing. That's a good safe harbor. Guideline three is you didn't owe anything last year. No changes. Don't set anything in. Go fast. Yeah, it's just been, you know, it sounds kind of obvious, but it is a. It's pretty straightforward. If you're like, well, I didn't owe last year, did you make more money? No. Then just file your extension. Okay, number four is, and I like what Matt said, if you made more money. Here's the calculation. It's not that hard. What did you. What was your tax rate last year? So what you do is you look at your AGI and then you take your tax bill and divide it by your AGI and that tells you your effective tax rate. So if last year you made, let's say, 150 grand and you sent in 10 grand in taxes, then you say, oh, let me see. Oh, I'm trying to do some math here in my head. I've got to make sure I get this right. So I'm going to say I owed 20 grand and I had 150,000 AGI. Okay, that's 13%. So let's just, so just go to your last year's return and say, okay, what did I ultimately pay in taxes? What was withheld? Plus I sent in. Divide that by your AGI, which is that line on the front page. Very easy. 13% in this example. Then that's step one and two. Then you go, Hmm, I made about 50 grand more this year. Just ballpark it. Just say estimate high because you don't want to have that penalty, right? So you say, oh, I made about 50 grand more this year. Ballpark. Okay, times $50,000, that's $6666. So you may say, okay, I'll send in seven grand.
Yeah.
Just estimate a little higher. Just a little math.
Yeah.
And you're done.
Now, as the tax brackets work, and many of you know this, we have a graduated tax scale. Right. So when at the 150 we're adding income on, that's actually at your highest rate, not your blended rate through the year. So this is the way if you want to send in kind of the minimum to see where you might be at. But you might actually owe a little bit more than that because of the blended scale.
So guideline number five says, well, I'm gonna, I'm. I know I'm gonna be in a higher bracket. I made an extra hundred grand. It was a little much, you know, da, da, da. So it's kind of. I don't know if I can rely on, on that effective rate. I'm going to. I'm a little nervous to rely on that. So I say the Safe harbor is 25%. Just, just think of how much more money you made last year compared to the, compared to the year before. Multiply it by 0.25. Send that in with what you sent in last year because it's on top of whatever you normally send in last year. And there's your deposit. So maybe if you massage your tax return properly, you'll get a little refund. Yeah. But at least you're not paying the penalties. So that's guideline five.
And some of you might be like, guys, I owe and I don't have the money to pay. Okay, that's okay. Still file the extension. Pay as much as you can. Get that in by April 18, you might be chunking away at it in some payments before you even file by October 15th.
Yeah.
And that by the time you file on October 15th, you're ready or you just got a little bit amount. You got to true up. Realize you are still going to have some penalty on that amount that's owed. But if you even can't get it all paid by the time you file, that's still okay. We've got a lot of other strategies there. There's 180 day to pay option that the IRS gives you where you just say, hey, you can request it. Give me an extra 180 days. This is after October 15th. I'm going to get caught up. And then, and then try to work your way back and get caught up.
I want to reiterate what Matt said. A lot of people get so stressed out and scared. I owe. I don't have enough to give to the irs. So I'm not even going to file the extension. Now, remember what's worse, not paying or not filing? Not filing. So out of fear, people don't send in the extension thinking, well, it's not going to help me anyway, I owe. Now the IRS is in the dark. They're pissed, right? So it's a very common thing for people to think, tell your friends, tell your family, don't do it yourself. File the damn extension. Then we'll worry about if you don't have enough to send in because again, the bigger penalty is not extending. So just do it. Get it on. Here's the five guidelines on how to estimate your debt deposit for your extension. Because you're going to file an extension anyway, everybody, right? We've convinced you. So now it's how much do you send in on that little line there? Number one, do a mock up of your return. Number two is if you didn't pay in last year and your income hasn't changed, don't stress. Number three, send in the same amount you did the prior year. How much did I owe last year? You have to look at how much was withheld versus how much you sent in. That's the tricky part I'm trying to comment on. Kind of have to look at that dynamic between withholding and paid and make sure you're putting in what you really need to. Number four. Four is where you're going to say, okay, I figured out what I owed last year and I'm going to paid in taxes. I'm going to divide that by my AGI and come up with my effective tax rate. And then I'm going to do a calculation. This is guideline number four. And go. Huh? I made 50 grand more or 20 grand more, not a significant amount. I'm going to multiply that by my effective tax rate and add that to my deposit. That's number four. Number five is where Matt said, all right, I had a big year last year, probably bumped into a higher bracket. My effective rate's really not going to be that accurate. That's when you go with the safe harbor 25%.
Those same formulas are what you'll do on the state return, by the way. So that same methodology works on the state return as well as the federal return.
All right, thanks everybody. Have a great weekend. We'll see you next week.
