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If you haven’t filed your taxes yet, it’s time to decide whether or not to apply for an extension, and part of that application is estimating tax due. The deadline to file your 2021 tax return is April 18 but an extension can push that deadline out to October 17.
For taxpayers missing documents or dealing with a complicated tax situation, this gives you more time to file, but keep in mind that this doesn’t give you more time to pay.
Uncle Sam still expects you to estimate your tax bill and pay what you owe by April 18.
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How to File a Tax Extension
You can get an automatic tax-filing extension by submitting Form 4868 using the IRS Free File tool, and Part II of the form asks you to estimate your tax bill for 2021.
While you’re not required to pay this amount to get the extension, the IRS recommends you do to avoid the 0.5% failure to pay penalty that’s charged each month that the tax goes unpaid. However, the penalty won’t exceed 25% of your unpaid taxes.
You can steer clear of the sky-high late payment penalties by paying the lesser of 100% of the tax due from your 2020 return (110% if your adjusted gross income (AGI) is over $150,000) or 90% of your estimated tax due for 2021 by April 18.
3 Ways to Estimate Your Taxes
If you’re not sure how much you owe, here are a relatively few painless ways to estimate your tax bill for 2021.
1. Reference What You Paid Last Year
The easiest way to estimate the tax you owe for 2021 is to base it on last year’s income, says Charles Corsello, an enrolled agent and founder of TaxCure LLC. “If you earned about the same amount as last year, you would owe about the same amount.”
Start by checking your total tax due for 2020—you can find this on line 24 of your 2020 tax return. Then subtract taxes you already paid in 2021 from this amount, which would include money that your employer withheld from your paychecks. If you made estimated tax payments because you’re self-employed, you can subtract those payments as well.
From there, subtract the tax credits you might qualify for to further reduce your tax liability. “It is important, though, to keep in mind any advanced Child Tax Credit payments you have already received,” says Corsello. Check Letter 6419 to see the amount you received and compare this amount to the credit amount for which you’re eligible. (If you haven’t received Letter 6419, or you misplaced it, you can also log into your IRS account to review those payments.)
If your advance payments were less than the amount of credit you’re entitled to, you could claim an additional credit. If the amount you received in advance exceeds the amount of the Child Tax Credit you qualify for, you may need to repay some or all of it.
Use our calculator to estimate your total child tax credit.
After you’ve taken your total tax due for 2020 and subtracted 2021 withholding, tax payments, eligible credits and rebates, you should get a decent estimate of what you owe for 2021, provided that nothing major has changed in your situation.
2. Estimate Your Taxable Income
Perhaps you got a raise or landed a job with a better salary in 2021. You’ll first need to calculate your taxable income to estimate the taxes owed since your earnings changed. Do this by taking your gross income and subtracting exemptions and deductions you qualify for.
Then reference your tax bracket to determine tax liability. For 2021, marginal rates are 10%, 12%, 22%, 24%, 32%, 35% and 37%. Where you fall depends on your income and filing status. Once you’ve figured out your total tax due, you can subtract money withheld from your paycheck for 2021 and any tax credits you qualify for to estimate your tax bill for the year.
If you get stuck with this calculation, you could work through the IRS’s 1040-ES 2021 Estimated Tax Worksheet. “It is long, but it provides directions and a form that you can use to accurately estimate what you will owe,” says Corsello.
For self-employed workers that don’t have tax withheld by an employer, the Self-Employment Tax and Deduction Worksheet part of 1040-ES can also help you estimate quarterly payments that need to be made on April 15, June 15, September 15 and January 15, 2023.
Read more: Everything to Know About 2022 Tax Deadlines and Dates
3. Use a Tax Calculator or Tax Software
Typing in your income, filing status and other information into an online income tax calculator or tax software is another—possibly less cumbersome—way to determine your tax liability.
“Many tax software filing programs only charge you when you file so you can get a ballpark number ahead of time,” Corsello says.
If you’re thinking about using a calculator or tax software, here are some potential pros and cons:
- You don’t have to break out the pen and paper to do the math
- You may be able to auto-fill certain tax documents into the tax software
- Tax software may walk you through the process in a question-and-answer format that’s easy to understand
- When you’re ready to file your tax return, you may be able to easily go back to the tax software and complete what you already started
- Limited or confusing instructions on calculators and software can lead to errors
- Tax software and calculators may not be able to handle complicated tax situations, and a tax professional could provide greater guidance
What if You Can’t Pay Your Tax Bill?
If you can’t pay taxes, don’t panic—but don’t ignore the situation either. Not filing your tax return at all comes with a steep tax penalty that’s 5% of your unpaid tax balance per month.
Instead of not filing, the IRS has payment options you could sign up for to pay over time, or you could borrow money to pay what you owe.
Here are a few options to consider.
Get on an IRS Payment Plan
Getting on an IRS payment plan doesn’t eliminate penalties on unpaid taxes—but it could reduce the cost. If you get on an approved payment plan, the late payment penalty is reduced from 0.5% to 0.25% per month. Signing up for the short-term plan is free, and it gives you 180 days to pay your tax bill.
Long-term repayment plans let you pay off what you owe in several monthly installments. The setup fee for a long-term plan is $31 if you sign up for autopay but bumps up to $130 if you don’t sign up to make payments through direct debit.
Apply for an Offer in Compromise (OIC)
If you’re experiencing financial hardship or you owe an amount that would be difficult to pay due to your income, the IRS may be willing to settle your tax bill for less than what you owe with what’s an “offer in compromise called.” The settlement or compromise amount may be paid in a lump sum or installments, and you can apply for a compromise with Form 656.
Should You File for a Tax Extension?
Since the IRS penalty for not filing is high, it makes sense to go ahead and file for an extension if you suspect you won’t make the April deadline.
You also don’t have to handle all of this alone, especially in a complicated tax scenario. A tax professional could help you navigate your extension and tax return filing if you’re unsure what to pay and how best to pay it.