October 15 is correct across the nook, so now could be the time to finalize that tax return you pushed off in April by submitting an extension.
Listed here are three issues it’s good to know as you wrap up your 2024 taxes and begin fascinated about tax 12 months 2025.
1. Widespread misconceptions about penalties and curiosity
Opposite to well-liked perception, submitting an extension in April doesn’t permit you to delay paying any tax you owe for final 12 months. You had been nonetheless presupposed to pay your entire quantity you owed (or thought you owed) by April 15.
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Submitting the extension simply saves you from the late submitting penalty (5% of the tax owed for every month you might be late, as much as 25%). In case you nonetheless owe taxes that you simply didn’t pay earlier than April 15, you should have late cost penalties of 0.5% of the tax owed every month you delay, plus extra each day curiosity.
On the flip facet, when you did pay any steadiness owed earlier than April 15, and/otherwise you count on to get a refund while you file the return, you wouldn’t have any penalties no matter whether or not you file the extension and the return on time or not.
It’s because the tax penalties are percentages of taxes owed, and if taxes owed are $0, you can not have a penalty.
Backside line: Submitting that extension again in April did not permit you to delay paying taxes, nevertheless it hopefully has given you time to complete getting ready the return and maybe determine some extra deductions that you did not have all documented correctly earlier than April.
2. Is it too late to benefit from extra deductions?
Whereas most alternatives for deductions ended on December 31 for tax 12 months 2024, there are some things you are able to do even now to decrease your tax burden.
For instance, when you filed an extension, you might be permitted to make SEP IRA or solo 401(okay) contributions (not common IRA contributions) earlier than October 15 and have them depend for 2024.
In case you file as an S company, the extension deadline handed on September 15, so you wouldn’t be capable to contribute to the SEP for 2024 at this level.
Whether or not it’s a good suggestion to contribute to the SEP is a extra sophisticated query. Although you may get monetary savings this 12 months (or for the 2024 tax 12 months) by contributing to a SEP or a solo 401(okay), these contribution {dollars} (and future progress) will nonetheless be taxed sooner or later.
Many taxpayers discover that they aren’t in a decrease tax bracket in retirement as they could have anticipated, particularly in the event that they saved substantial quantities in tax-deferred buckets throughout their working years.
It’s usually higher to pay tax on the seed and never the harvest. For instance, make the most of Roth IRAs or life insurance-based methods. You possibly can contribute to a solo 401(okay) as a Roth contribution (after-tax) so long as you do it earlier than October 15.
In concept, SEP IRAs at the moment are allowed to simply accept Roth contributions as effectively, attributable to provisions within the SECURE 2.0 Act, however only a few, if any, custodians have the back-end methods set as much as permit Roth contributions.
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You may as well do a “backdoor Roth” by contributing to a SEP after which changing that SEP to a Roth account the next 12 months.
In brief, do not be afraid to pay somewhat extra tax now if it may prevent much more tax sooner or later. Using Roth, life insurance coverage and different tax-free methods may be very advantageous for the long run, despite the fact that you continue to have the short-term ache of the tax chew at this time.
3. Planning forward for submitting your 2025 taxes
As soon as you’ve got completed and filed your 2024 tax return, there are some necessary choices to make for the 2025 tax 12 months, together with home windows of alternative that shut on December 31.
Listed here are just a few:
Roth conversions. In contrast to some forms of Roth or conventional IRA contributions, you can not backdate a Roth conversion, so any conversions must be accomplished in calendar 12 months 2025.
The excellent news is, due to the One Huge Lovely Invoice (OBBB) that turned legislation in July, most taxpayers have fairly a bit extra room to do Roth conversions with out going into a better bracket, attributable to elevated deductions and different elements.
Capital beneficial properties. With the market persevering with to hit all-time highs, many taxpayers are contemplating cashing in on the massive beneficial properties from this 12 months. Due to the brand new tax legislation modifications, there’s extra room than ever within the 0% capital beneficial properties bracket.
However watch out that the capital beneficial properties don’t trigger a cascading impact on different taxable earnings. Typically it’s higher to reposition certified cash (IRA/401(okay) accounts) as a result of there aren’t any quick tax penalties to purchasing and promoting inside these accounts.
Banks/Treasuries/cash market accounts. With rates of interest having been so excessive the final couple of years, many individuals have massive money holdings in CDs or cash market accounts, that are producing taxable curiosity.
As rates of interest decline, it could be doable to defer the curiosity with a set annuity. You possibly can doubtlessly lock in a better fee for a for much longer time than a CD, however you do not pay any tax till you withdraw the funds sometime (after age 59½).
So, when you needn’t entry the funds any time quickly, however you need to maintain it secure from market losses and taxes, this could possibly be a great technique. It might additionally provide you with extra room for Roth conversions.
As you finalize your 2024 tax return and sit up for tax 12 months 2025, keep in mind that good tax planning is an ongoing course of.
By understanding widespread misconceptions about penalties, exploring accessible deductions and strategically planning for Roth conversions, capital beneficial properties and money holdings, you may optimize your monetary future.
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This text was written by and presents the views of our contributing adviser, not the Kiplinger editorial workers. You possibly can examine adviser data with the SEC or with FINRA.
