Author: Simon Filip

Simon Filip, CPA, MSPA, MST

Understanding IRC Code Section 1033

Understanding IRC Code Section 1033Unfortunately, 2018 has been another year of major disasters due to hurricanes, fires, and floods. As taxpayers turn to the process of restoring property, some may be considering whether a 1033 exchange is more relevant than a 1031 exchange.

This blog entry examines some of the key aspects of the 1033 exchange.

What is an IRC 1033 exchange?

A section 1033 exchange, named for Section 1033 of the Internal Revenue Code, applies when you lose property through a casualty, theft or condemnation and realize gain from the insurance or condemnation proceeds. If your accountant or tax advisor believes you will realize gain from the insurance or condemnation proceeds, you may be able to defer that gain using a 1033 exchange.

Compared to IRC 1031

Internal Revenue Code Section 1031, commonly referred to as a “like-kind exchange,” does not allow a taxpayer to hold or benefit from the proceeds during the exchange period. It also requires the replacement property be identified within 45 days and acquired within 180 days after the closing of the relinquished property. If a taxpayer is deferring gain in a 1033 exchange, he can hold the proceeds until the acquisition of the replacement property and an intermediary is not required.

Replacement property

Another difference between a 1031 and a 1033 exchange is the standard that is used to limit what you can buy as replacement property. In general, the standard is more restrictive under 1033 than the like-kind standard under IRC 1031. Section 1033 provides the replacement property must be “similar or related in service or use” to the property that was lost in the casualty or condemnation. It is important to note the Tax Cuts and Jobs Act of 2017 eliminated tax-deferred like-kind exchanges of personal property, but allows exchanges of business and investment real estate.

Time period

The time period allowed for the taxpayer to acquire the replacement property is much more liberal than Section 1031 exchanges. The period begins at the earlier of when the taxpayer first discovers the threat or imminence of condemnation proceedings or when the condemnation or other involuntary conversion occurs. The period ends either two or three years after the end of the tax year in which the conversion occurs. The time period is three years for real property held for business or investment and two years for all other property. If the taxpayer has lost property in a federally declared disaster area, Section 1033 gives the taxpayer a two year extension on the replacement period, granting a total of four years in which to replace the lost property.

Taxpayers having lost their property due to casualties or those facing condemnation should consult with their tax advisors to take advantage of the tax deferral afforded under Section 1033 if they wish to replace their lost property.

We’ve got your back

With Simon Filip, the Real Estate Tax Guy, on your side, you can focus on your real estate investments while he and his team take care of your accounting and taxes. Contact him at [email protected] or 201.655.7411 today.

 

Deeper Dive into Single Member Limited Liability Companies

Deeper Dive into Single Member Limited Liability CompaniesEntity classification

LLCs with two or more members can be treated as a partnership or corporation for tax purposes. An LLC with one owner or single member limited liability company (SMLLC) can choose to be treated as a corporation or a “disregarded entity.”

The member of a SMLLC who wishes to be treated as corporation for tax purposes must file either Form 8832 to be treated as a ‘C’ Corporation or Form 2553 to elect classification as an ‘S’ Corporation. Where an individual does not file Forms 8832 or 2553 to elect to be treated as a corporation, the IRS will treat the LLC as a disregarded entity and it will be taxed as a sole proprietorship.

Tax treatment

By default, the IRS treats a SMLLC as a “disregarded entity.” This means the IRS will not look at a SMLLC as an entity separate from its sole member for the purpose of filing tax returns. Instead, similar to a sole proprietorship, the IRS will disregard the SMLLC and the member will report income and expenses and pay taxes for the business as part of his or her own personal tax return. Taxable income or loss generated by an operating business will be reported on Schedule C, while rental income will be reported on Schedule E. Since the ultimate responsibility for paying taxes on income generated by a SMLLC is passed through to the member, this way of taxing profits is called pass-through taxation.

Profits earned

As a disregarded entity, if the SMLLC has taxable profits for a given year, the sole member is required to pay taxes on that profit, regardless of whether the profits are actually distributed to the member. It is not relevant whether a member of a SMLLC leaves the profits in the business bank account or withdraws the money. Regardless, all income or loss are reported by the SMLLC owner for income taxation.

Example

Steve’s SMLLC, which owns rental real estate, earned $25,000 this year after expenses and depreciation. Steve decides that he doesn’t need the money and will leave the entire $25,000 in his business checking account to use next year. Steve will have to report and pay tax on the full $25,000.

SMLLC to partnership

There are instances when a SMLLC ceases to be a disregarded entity. One instance this is accomplished is through the addition of one or more new members to the limited liability company. The LLC’s tax reporting after an additional member is admitted no longer is reflected on Schedules C or E of the former sole member. The entity has become a multi-member limited liability company and must obtain an Employer Identification Number and file a partnership return.

We’ve got your back

With Simon Filip, the Real Estate Tax Guy, on your side, you can focus on your real estate investments while he and his team take care of your accounting and taxes. Contact him at [email protected] or 201.655.7411 today.

Understanding the Mortgage Interest Deduction after the Tax Cuts and Jobs Act

Understanding the Mortgage Interest Deduction after the Tax Cuts and Jobs ActThe TCJA modified the mortgage interest deduction for homeowners. Here’s what you need to know about the changes.

Home ownership has long been the American dream.  Mortgage loans have made it possible for the majority of American homeowners to afford buying a home. The government has encouraged home-ownership by offering tax breaks linked to mortgages, but recent changes in tax law changes how much a typical homeowner-taxpayer will benefit from the deductions. In 2018, the Tax Cuts and Jobs Act (TCJA) changed the rules on how much mortgage interest can be deducted from taxable income.

Mortgage limits

Mortgage interest was one of the biggest deductions that tax law allowed. Unlike interest in borrowing for personal expenses, mortgage interest on a taxpayer’s residence can be deducted as an itemized deduction.

TCJA modified the mortgage interest deduction in several ways. The change that garnered the most attention was the reduction in the amount of interest that you’re allowed to deduct. Going forward, taxpayers will only be able to deduct interest on up to $750,000 of mortgage debt, down from $1 million under prior law.

The old $1 million mortgage limit is grandfathered in for existing mortgages, but if a taxpayer obtains a new mortgage post-TCJA, they will be subject to the lower limit. Taxpayers obtaining new mortgages exceeding $750,000are still eligible for a mortgage deduction, however, it will only be on the portion of interest attributable to the first $750,000 borrowing.

Home equity debt

Under old law, taxpayers could deduct interest on up to $100,000 of home equity debt. This allowed taxpayers to do whatever they wanted with the money, including paying down other types of debt (credit card, student loan, auto loans, etc.) or spending on things unrelated to their residence while still able to deduct the interest.

Tax reform under TCJA partially took away the ability to deduct interest on home equity debt. The interest is still tax deductible if the loan is used to buy, build, or improve your home and doesn’t bring the total outstanding mortgage above the new $750,000 limit. If the home equity debt was used for other purposes, it is no longer deductible. Unlike other changes, existing home equity loans were not grandfathered in.

Refinancing

It is important for taxpayers to understand how refinancing an existing mortgage will work for income tax purposes. When a taxpayer takes a mortgage to buy or build a home, it counts as home acquisition debt and is capped at $750,000. A mortgage for other purposes is treated as a home equity debt and now receives no interest deduction. When a taxpayer refinances a mortgage they originally counted as home acquisition debt, the refinanced mortgage will also count as home acquisition debt as long as it is in the same amount. If there is excess borrowed in the refinancing, the extra portion of cash pulled out will be treated as home equity debt, so that portion of the interest you pay won’t be deductible unless it is used to improve the home.

Key takeaways

  1. Interest payments are deductible on mortgage debt up to $750,000 (formerly $1 million).
  2. Deduction for other home equity debt (HELOCs and second mortgages eliminated (formerly $100,000).

With Simon Filip, the Real Estate Tax Guy, on your side, you can focus on your real estate investments while he and his team take care of your accounting and taxes. Contact him at [email protected] or 201.655.7411 today.

Real Estate FAQs from Last Month

Answers to real estate FAQs on 1031s and more

My team and I regularly receive questions on real estate-related topics. In this blog post, I answer some of those questions as they are important and others likely need the answers.

Realty Transfer Fee

Question: What is the realty transfer fee and who can expect to pay it?
Answers to this month's real estate FAQs
Answer:  The Realty Transfer Fee, also known as “RTF,” is a fee imposed by the State of New Jersey to offset the costs of tracking real estate transactions. Upon the transfer of the deed to the buyer, the seller pays the RTF, which is based upon the property sales price.

The RTF rate is a graduated rate and there are two different structures, depending on whether the total consideration is over or under $350,000.

It is important to note that a 1% fee must be paid by the buyer on all real estate transactions over $1 million in all commercial and residential property classes. This is also known as the “Mansion Tax.”

1031 Exchange Identification Rule

Question: What happens if you list three properties as replacement properties for your 1031 exchange, but all properties are no longer available?

Answer: One of the requirements of a 1031 exchange is taxpayers must identify a list of properties for potential purchase within 45 calendar days. Whichever property is ultimately purchased must be on this list. The rule allows taxpayers to identify three properties without limitation. Those listed are property that may be purchased, however not all are required to be purchased. If more than three properties are identified, the IRS rules become narrower and stringent.

The list can be changed an infinite amount of times until midnight of the 45th day. If the taxpayer is beyond the 45th day, the list is unchangeable and only properties listed can be chosen to complete the exchange. If the properties are not available after the 45th day, a 1031 exchange cannot be completed and the transaction is not eligible for deferral under Code Section 1031.

Section 179 Expensing

Question: Did the Tax Cut and Jobs Act (TCJA) change 179 expensing for rental property owners?

Answer: A provision of the tax code, commonly known as Section 179 deduction, allows taxpayers to deduct the entire cost of eligible property in the first year it is placed in service. For rental real estate owners, eligible property includes the majority of improvements to the interior portion of a nonresidential building, provided the improvement is put to use after the date the building was placed in service

The TCJA expanded the definition of eligible property to include expenditures for nonresidential roofs, HVAC equipment, fire protection and alarm systems, and security systems.

We’ve got your back

Have a burning real estate question? Email me and I’ll answer it in an upcoming post.

Qualified Joint Venture between Spouses

Qualified Joint Venture between SpousesAn unincorporated business jointly owned by a married couple is generally classified as a partnership for federal tax purposes. However, in 2007, there was an addition to the Internal Revenue Code that excludes from partnership status a Qualified Joint Venture (“QJV”) conducted by a married couple who file a joint return. This was enacted by Congress to alleviate what was considered an unnecessary burden of filing partnership returns where the only members of a business joint venture are a husband and wife filing a joint income tax return.

Definition of a Qualified Joint Venture

QJV is defined as any joint venture involving the conduct of a trade or business if:

  1. the only members of the joint venture are married;
  2. both spouses materially participate;[1] and
  3. both spouses elect the application of QJV treatment.

A qualified joint venture, for purposes of the provision enacted in 2007, includes only businesses that are owned and operated by spouses as co-owners and not in the name of a state law entity (including a limited partnership or limited liability company). If the business is owned and operated by spouses as co-owners, it will not qualify for the election. There are special rules for married couple state law entities in community property states.[2]

Filing requirements for qualified joint ventures

As a result of utilizing the QJV election each spouse should file a separate Schedule C reporting his or her respective share of the items of the venture. There is no prescribed form for making the election.  The election is deemed made on a jointly filed Form 1040 by dividing all items of income, gain, loss, deduction, and credit between each spouse in accordance with each spouse’s respective interest in the joint venture, and each spouse filing with the Form 1040 a separate Schedule C (Profit or Loss from Business).

QJV implications for real estate

Now that you have the basics of a QJV, you might be thinking, “isn’t this a real estate blog?”

You’re correct, this is a real estate blog.

If you and your spouse each materially participate as defined under the at-risk and passive activity limitations and you file a joint return for the tax year, you may elect to be taxed as a qualified joint venture instead of a partnership. By making the election, you will not be required to file Form 1065 Return of Partnership Income, for any year the election is in effect and will instead report the income and deduction directly on your joint return.

To make this election for a rental real estate business, check the “QJV” box on line 2 for each property that is part of the qualified joint venture.

The confusion surrounding a QJV typically arises in non-community property states, including New Jersey and New York, where spouses jointly own interests in an LLC.  The LLC purchases a rental property, which now needs to be reported on a partnership return instead of Schedule E of the individuals’ 1040s. As noted above, the QJV will not apply to a venture that is in the name of a state law entity.

We’ve got your back

If you are considering not filing a partnership return because of the QJV election, you should contact your preparer to review the rules, especially related to rentals owned by LLCs where spouses are the only members.

With Simon Filip, the Real Estate Tax Guy, on your side, you can focus on your real estate investments while he and his team take care of your accounting and taxes. Contact him at [email protected] or 201.655.7411 today.

[1] IRC Section 469(h).

[2] Rev. Proc. 2002-69.

Tax Implications on Sale of a Partnership Interest

In determining gain or loss on sale of a partnership interest, taxpayers are often surprised to find they have a taxable gain.

For income tax purposes gain or loss is the difference between the amount realized and adjusted basis of the partnership interest in the hands of the partner.

Amount Realized

The amount the partner will realize will include any cash and the fair market value of any property received.  Further, if the partnership has liabilities, the amount realized will include the partner’s share of the partnership liabilities. If the partner remains liable for the debt, the amount realized will not include the partner’s share of the liability.Tax Implications on Sale of a Partnership Interest

Examples of Amount Realized:

Example 1 – Sale of Partnership interest with no debt:

Amy is a member in ABC, LLC which has no outstanding liabilities. Amy sells her entire interest to Dave for $30,000 of cash and property that has a fair market value of $70,000. Amy’s amount realized is $100,000.

Example 2 – Sale of partnership interest with partnership debt:

Amy is a member of ABC, LLC and has a $23,000 basis in her interest. Amy’s membership interest is 1/3 of the LLC. When Amy sells her 1/3 interest for $100,000 the partnership has a liability of $9,000. Amy’s amount realized would be $103,000 ($100,000 + ($9,000 x 1/3).

Gain Realized

Generally, a partner selling his partnership interest recognizes capital gain or loss on the sale. The amount of the gain or loss recognized is the difference between the amount realized and the partner’s adjusted tax basis in his partnership interest.

Example 1 (from above)- Sale of Partnership interest with no debt:

Assume Amy’s basis was $40,000. Amy would realize a gain of $60,000 ($100,000 – $40,000).

Example 2 (from above) – Sale of partnership interest with partnership debt:

Amy’s basis was $23,000. Amy would realize a gain of $80,000 ($103,000 realized less $23,000 basis).

Character of Gain

Partnership taxation establishes the general rule that gain on sale a partnership interest receives favorable capital gain treatment.  However, gains attributable to so-called “hot assets,” which include inventory, depreciation recapture, and accounts receivable of a cash basis partnership are taxed at less favorable ordinary income rates.

To the extent that a sale is attributable to the selling partner’s share of the hot assets, the resulting gain or loss is taxed at ordinary income rates. When real estate is sold to the extent the gain on sale is attributable to depreciation deductions, the resulting gain is treated as unrecaptured IRC §1250 section gain. §1250 gain is taxed at a flat 25% rate.

Like-Kind Exchange

It is important to note that in IRC §1031 (like-kind exchange), non-recognition treatment does not apply to exchanges of partnership interests.

We’ve Got Your Back

If you’re selling your partnership interest, we can help you plan the sale so that you pay no more tax than necessary. Contact Simon Filip, the Real Estate Tax Guy, at [email protected] or 201.655.7411 today.

Estate Tax Implications for Foreign Investors in US Real Estate

Estate taxes for US persons

An estate of a US citizen or resident alien is subject to an estate tax based upon the value of the worldwide property, owned or subject to certain rights or powers by the decedent on the date of death. The estate tax rate for 2018 is 40% for taxable estates in excess of an $11.18 million exemption, which is adjusted annually for inflation.Estate Tax Implications for Foreign Investors in US Real Estate

A US estate may also deduct from the taxable estate a marital deduction equal to the value of property left to a surviving spouse. The amount of lifetime taxable gifts during the decedent’s life is also included in calculating the gross estate.

Non-resident aliens and their estate taxes

While US citizens and residents are subject to worldwide estate and gift taxation on their gratuitous transfers, non-residents (persons who are neither US citizens nor US domiciliaries) are only subject to the US estate tax on property that is situated, or deemed situated, in the United States.

The gross estate of a Non-Resident Alien (“NRA”) includes all tangible and intangible property situated in the US, in which the decedent has an interest at the time of his death or over which he has certain rights or powers.

The taxable estate of an NRA is taxed at rates up to 40% of the value of estate in excess of a $60,000 exemption. Additionally, the estate of an NRA is generally not allowed a marital deduction unless the surviving spouse is a US citizen.

US property included in an NRA’s estate includes US real property owned or under his control and interests in US partnerships (including those holding positions in real property).

It is important to note the US does have estate tax treaties with multiple countries including Canada, France, Germany, Greece, Italy, Japan, and the UK, amongst others. These treaties may provide estate tax relief to residents of treaty jurisdictions.

Non-citizen spouse

When your spouse is not a US citizen, the unlimited marital deduction is unavailable. This is true regardless of whether or not the decedent is an American citizen. The result is the $11.18 million exemption is unavailable and the entire estate transferred to a non-citizen spouse would be subject to estate tax. With advance planning, the non-citizen spouse estate tax implication can be reduced or eliminated.

Planning to reduce estate taxes

There are several structures that will avoid or minimize the US estate tax of a Non-Resident Alien:

  1. The property can be held in the name of a foreign corporation.
  2. The property can be held in an irrevocable trust or a trust whose assets would not be included in the settlor’s gross estate for US estate tax purposes.
  3. The title can be held in a two-tier structure with the property in the name of an American company (US real property Holding Corporation) whose shares are held by an offshore company.

Although these structures are intended to avoid the US estate tax, the structures may result in the unintended consequence of higher taxes on sale, rental income, and, in some jurisdictions, franchise taxes.

We’ve got your back

If you are a Non-Resident Alien, we can help you plan so that your estate pays no more tax than necessary, while avoiding those unintended consequences. Contact Simon Filip, the Real Estate Tax Guy, at [email protected] or 201.655.7411 today.

Qualified Opportunity Zones under the Tax Cuts and Jobs Act

QO Zones offer incentives for investment in low income communities

Qualified Opportunity Zones under the Tax Cuts and Jobs Act

The Qualified Opportunity Zone Program (“QO Program”) enacted as part of The Tax Cuts and Jobs Act is a new incentive designed to promote investment in low-income communities by allowing taxpayers to defer, reduce, and potentially exclude gain recognition on certain investments made in Qualified Opportunity Zones (“QO Zones”).

Qualified Opportunity Funds (“QO Funds”)

Investors wishing to utilize the Opportunity Zone Program must invest their gain in a QO Fund. In order to meet the criteria of a QO Fund, 90% of the assets held by the vehicle on the last day of the fund’s taxable year (and the last day of the first six month period of the fund’s taxable year) must be qualified opportunity zone property (“QOZ Property”) within a QO Zone acquired after December 1, 2017.

The Act requires the Treasury Secretary to establish guidance for the certification process of QO Funds, which will likely be administered by the Department of Treasury’s Community Development Financial Institutions Fund (“CDFI Fund”).

What are QO Zones?

The QO Program requires a QO Fund to make direct or indirect investments in a QO Zone. Qualified Opportunity Zones (QO Zones) are defined as certain low-income communities that are experiencing uneven economic development, resulting in pockets of disinvestment and unemployment.

In New Jersey, Governor Murphy nominated 169 low-income tracts in 20 counties for designations a QO Zones. On April 9th, the U.S. Department of Treasury approved Governor Murphy’s designation of such tracts as QO Zones.

Tax Benefits of Investing in Opportunity Zones

The QO Program offers three tax benefits for investing in low-income communities through a QO Fund:

  1. A temporary deferral of inclusion in taxable income for capital gains reinvested in an Opportunity Fund. The deferred gain must be recognized on the earlier of the dates on which the opportunity zone investment is disposed of or December 31, 2026.
  2. A step-up in basis for capital gains reinvested in an Opportunity Fund. The basis is increased by 10% of the investment in the Opportunity Fund is held by the taxpayer for at least 5 years and an additional 5% is held for at least 7 years, thereby excluding up to 15% of the original gain from taxation.
  3. A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Fund if the investment is held at least 10 years. This exclusion only applies to gains accrued after an investment in an Opportunity Fund.

Other Highlights

Some important items to note under the QO Program:

  1. Gains must be reinvested within 180 days in order to qualify for tax deferral under the QO Program.
  2. There is no “like-kind” requirement as part of the program. An investor could sell a mutual fund and reinvest gains into a QO Fund that will develop real estate in one of the selected census tracts.
  3. The program is still being formulated. The next step is for the Treasury Department to promulgate regulations for the establishment of Opportunity Funds, the vehicles which QO Zones investments will be made.

We’ve got your back

Like many other aspects of the new tax law, QO Zones can get complicated. With Simon Filip, the Real Estate Tax Guy, on your side, you can focus on your real estate investments while he and his team take care of your accounting and taxes. Contact him at [email protected] or 201.655.7411 today.

Tax Cuts & Jobs Act and Section 199A

Tax Cuts & Jobs Act and Section 199AFor taxable years beginning after December 31, 2017 and before January 1, 2026, non-corporate taxpayers (individuals, trusts, and estates) may take a deduction equal to 20 percent of Qualified Business Income (QBI) from partnerships, S corporations, and sole proprietorships.

QBI includes the net domestic business taxable income, gain, deduction, and loss with respect to any qualified trade or business.

The deduction is available without limitation to individuals as well as trusts and estates where taxable income is below $157,500 if single and $315,000 if married filing jointly. There is a phase-out when taxable income from all sources exceeds $157,500 to $207,500 for single filers and $315,000 to $415,000 if married filing jointly. The deduction is 20 percent of the qualified business income, further limited of 20 percent of taxable income.

For example: Amy is a small business owner and files a schedule C.

  • Amy made $100,000 net income from her business in 2018.
  • Amy files a single return and her taxable income is $70,000.
  • Amy’s Sec. 199A deduction is 20% of $70,000, or $14,000.

QBI is determined for each trade or business of the taxpayer. The determination of accepted trades takes into account these items only to the extent included or allowed in the taxable income for the year. This figure cannot be deducted on the business return. There are two different categories in which trades and business can classified, Specified Service and Qualified.

Specified service means any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, including investing and investment management, trading, or dealing in securities, partnership interests, or commodities, and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees. Engineering and architecture, originally included as specified service trades or businesses, were omitted in the final version of the TCJA.

Qualified means any trade or business other than a specified service trade or business and other than the trade or business of being an employee. Industry types include manufacturing, distribution, real estate, construction, retail, food and restaurants, etc.

The Section 199A deduction for individuals above the taxable income threshold is limited to the greater of either:

  • 50 percent of the taxpayer’s allocable share of W-2 wages paid by the business, or
  • 25 percent of the taxpayer’s allocable share of W-2 wages paid by the business plus 2.5% of the taxpayer’s allocable share of the unadjusted basis immediately after acquisition of all qualified property

Taxpayers should run the numbers through both provisions to ensure they received the best possible deduction.

We’ve got your back

The new tax code is complex and every taxpayer’s situation is different – so don’t go it alone! Contact Simon Filip at [email protected] or 201.655.7411 to discuss your situation.

What You Need to Know About Individual Tax Extensions

What You Need to Know About Individual Tax ExtensionsBasic Rules for Individuals

For individual taxpayers, the Internal Revenue Service (IRS) grants a six month extension to file your taxes each year as long as you complete Form 4868.

Filing an extension does not remove a taxpayer’s obligation to pay their income tax by April 15th. Taxpayers are expected to pay income tax to the IRS on time or they will be subject to late fees, penalties, and interest. This means taxes owed should be remitted by April 15th, regardless of an extension request.

Taxpayers have a few extra days this filing season. April 15th falls on a Sunday and Emancipation Day in the District of Columbia is observed on April 16th, resulting in a due date of April 17, 2018 for 2017 returns.

The extension allows taxpayers to gather all information needed to file a complete and accurate return without being assessed a late filing penalty. Taxpayers with complicated tax returns and those who have invested in partnerships or S Corporations and do not receive their K-1s until after the original April 15th due date should request extensions. The entities may have extended their own due dates, resulting in returns not being required to file until September 15th, with extensions.

A Federal income tax extension is good for six months, which extends an individual taxpayer’s filing deadline from April 15th to October 15th.

Penalties

Regardless of when an individual files a tax return, if the tax owed is not paid by the original  filing deadline (April 15th for individuals), the IRS will assess penalties.  The IRS will charge 0.5% each month of the amount of tax owed after the deadline.

When a taxpayer fails to file a return by the extension date, the penalty increases to 5 percent per month and subject to a maximum penalty of 25 percent.

State Extensions

The rules on state extensions are similar to those of the Federal. If the taxes are not paid by the original due date, there may be late payment penalties and interest. Some states do not require a separate extension to be filed if there is no tax due. For example, New Jersey grants an automatic extension of 6 months if there is no balance due and a Federal extension is filed. New York, on the other hand, requires an extension filing even if there is not a tax due with the return.

If you’re interested in learning more about how to manage your taxes, contact KRS today for a complimentary initial consultation.