PennyWise Episode 53: Your top tax questions about filing this year, answered by our expert
Unless you enjoy throwing money away, you’ll want to do all you can to avoid being hit with tax penalties and interest if you end up owing money to the IRS on your 2021 tax return.
Even a relatively small balance owed can balloon quickly. Say you owe the IRS another $1,000, but don’t file your return or pay the money for six months past the original due date. Your bill could grow to at least $1,615.
Here’s a breakdown of how penalties and interest accrue and how to protect yourself from that happening.
Missing the filing deadline
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You could be subject to a failure-to-file penalty if you still owe money to the IRS for the 2021 tax year.
You could be subject to a failure-to-file penalty if you still owe money to the IRS for tax year 2021 and do not file your federal tax return by your official filing deadline. That is April 18 for most people, April 19 for residents of Maine and Massachusetts, and a month or more later for people living in federally declared disaster areas, or US taxpayers living outside of the country on April 18.
The failure-to-file penalty is steep: 5% of the unpaid tax you owe for each month or part of a month that your return is late. That means if you’re supposed to file on April 18 but don’t do so until May 5, you must pay 10% of your balance for being two months late, said Larry Gray, a CPA and managing partner of AGCCPA in Missouri.
The maximum penalty you pay is capped at 25% of your outstanding balance. That is helpful in instances when you owe large sums like, say, $10,000. In that case, you wouldn’t owe more than $2,500 after five months.
However, with smaller balances, you’re likely to pay more than 25% because you’ll be hit with a minimum penalty that applies when you’re more than 60 days late. That minimum is set at $435 or 100% of your tax due, whichever is less.
So on a $1,000 balance, you’d owe $435 at the six-month mark just for not filing on time.
(If you’re due a refund, you won’t be hit with a fee.)
The good news: It’s ridiculously easy to avoid the failure-to-file penalty. If you can’t submit a complete and accurate return by April 18, stop what you’re doing right now and request an automatic six-month extension by filling out Form 4868. That way you’ll have until October 17 to file your return without a late filing penalty.
The late payment penalty
Even if you file on time or file for an extension and avoid the failure-to-file penalty, you could be subject to a late payment penalty unless you pay off your balance in full by the original filing date.
If you don’t, you will have to pay 0.5% on your outstanding balance for every month or part of a month that you’re late. The longer you wait to pay, the greater the penalty, although the maximum penalty here is also capped at 25% of your outstanding balance.
So if you owe $1,000 and don’t pay it for six months, you could owe another $30 ($5 a month for six months). If you delay payment longer, you would cap out at a maximum of $250.
You can minimize the penalty in a couple of ways. Pay at least part of what you owe by the original filing due date. Or, if you file your return and are put on an approved payment plan with the IRS, the 0.5% per month penalty gets reduced to 0.25% of your outstanding balance, Gray noted.
On the other hand, he said, your penalty rate could go up to 1% a month if you’ve been very delinquent and do not repay what’s owed within 10 days of getting a notice CP504 from the IRS. That notice informs you that if you don’t pay what you owe, the agency will levy your bank account, wages or state refund to settle your account.
If you have a good reason for not paying on time, you can make your case to the IRS by attaching a statement to your return whenever you do file it. If the IRS accepts your explanation, it may waive the penalty. At a minimum, you need to show that your failure to pay is not the result of “willful neglect.” As the IRS puts it, “making a good faith payment as soon as you can may help to establish that your initial failure to pay timely was due to reasonable cause and not willful neglect.”
Keep in mind that if you don’t file your taxes or pay what you owe, you’ll be hit with both the failure-to-file fee and the late payment penalty. The exception here is if you live in a federally declared disaster area in which case the IRS typically grants both an extension to file and to make tax payments.
Don’t forget, there’s interest too
Failure to file and late payment penalties are hardly the only levers the IRS can pull. You also could get hit with “accuracy-related” penalties if, for instance, you seriously understate the tax you owe, which can result from underreporting your income. Or if you willfully ignore tax rules.
Whatever you get hit with, until you pay your tax bill in full, interest will continue to accrue on both your unpaid tax balance and even on the subsequent penalties that get added to your tab if they go unpaid. The IRS adjusts its interest rates quarterly — and sets them at the federal funds rate, plus 3%.
Of course, the best way to avoid these expensive headaches is to file on time and pay in full. But if you’re coming up short on the money front, the IRS offers this advice: “Often, you can borrow the funds necessary to pay your tax at a lower effective rate than the combined IRS interest and penalty rate.”
Buy this, not that: Pro tips to save at the grocery store
How to save on groceries
You’re probably not too happy with your grocery bills these days. But there are strategies to help you shop without breaking the bank.
Food prices rose 1% in February, the largest monthly increase since April 2020. Over the past 12 months, overall food prices increased 7.9%, the biggest jump since July 1981. Grocery store prices rose at an even faster clip.
Every food item tracked by the Bureau of Labor Statistics was more expensive last month than it was a year ago. Meat, eggs and soup prices have the widest gap from last year, jumping by double-digits through February.
“When it comes to saving money on groceries, consumers have many options, but it does require making changes to our routines and some savvy decision making,” said Carman Allison at NielsenIQ.
Make a shopping list
Grocery stores are well trained in the science of stimulating your taste buds.
The best way to avoid impulsive buys that add to your grocery bill? Make a list beforehand of what you’re there buy — and stick to it. Don’t get distracted by all those desserts and snacks that aren’t on your list.
Planning ahead and shopping with a list help keep you focused on what you need and reduces time browsing around, where temptations can take hold.
Be deliberate at the store and don’t add extra stuff to your cart while you wait in the checkout line, where stores tend to put hard-to-resist sweets and other eye-catching items.
Shop around
Finding the best deals means shopping around and comparing prices on products at different stores. One might have better prices on eggs, but another might be cheaper for fish.
“I do not have allegiance to any one supermarket. If you’ve got the best price, you’re my best friend at that moment,” said Edgar Dworsky, a former assistant attorney general in Massachusetts and founder of Consumer World, an education resource.
But don’t just compare prices among the same types of stores. Supermarkets, big box outlets, wholesale clubs, discount grocers and dollar store chains all have different prices and promotion strategies. Check out co-ops and farmers’ markets too.
“People can save a lot of money if they know how these stores are set up,” said Victor Martino, the founder of grocery consulting firm Third Wave Strategies. He recommends shopping at at least two different store formats.
Look for promotions and deals
Stores put out weekly advertisements for sale items in print and online.
Find out when a store releases those offers. Many put out their circular ads on Wednesdays, so that’s often the best day to find deals. Check them out and compare.
If there’s a great deal, consider stocking up on the product.
“When apple juice is 99 cents a gallon, I will buy a case or two,” Dworsky said.
And to make sure you’re actually getting a good deal, take a look at the price history of products on websites such as CamelCamelCamel.
Use a store loyalty card
Most supermarkets offer free loyalty cards with special deals and savings for members. Some grocers’ loyalty cards also offer savings on gas.
Use them.
If you’re not using a loyalty card, “you’re throwing money away,” Dworsky said. “It’s absolutely crazy.”
Switch to store brands
Stores’ private-label brands used to be considered cheap knockoffs. But grocers have spent a lot of time and money in recent years improving their products.
House brands are often produced by the same manufacturers that make the big-name items, but they’re typically cheaper. Switching to a private label alternative can save shoppers anywhere from 10% to 40%, according to David Bishop, a partner at grocery consulting firm Brick Meets Click.
Experts consider Costco’s Kirkland Signature to be one of the top private-label brands. Other store brands include Great Value from Walmart, Simple Truth from Kroger and Good & Gather from Target.
Beware of ‘shrinkflation’
Less cereal in the box. Smaller snack sizes. Ice cream gone missing in a container.
You’re not losing your mind. You are actually paying the same price or more these days for everyday items but running through them more quickly because their sizes have shrunk.
The reason? A sneaky tactic known as “shrinkflation,” deployed by consumer product brands and grocery stores. The phenomenon has been going on for decades, but it typically becomes more common when companies’ costs go up, such as during the inflation surge we are seeing today.
There’s a way to beat shrinkflation though, say experts: Compare unit pricing — the price per ounce or per 100-count — on similar products to see which is the better deal.
Buy frozen meat and veggies
Meat has seen some of the sharpest price increases during the pandemic.
In February, meat prices rose 14% from a year ago. Chicken was right behind, up 13%.
“Frozen chicken breasts are good quality, can be defrosted one at a time and the savings are significant,” said David D’Arezzo, a former chief merchant at Dollar General and an executive at pharmacy and supermarket chains.
Frozen vegetables are also a good option, he said. They don’t go bad or spoil like fresh vegetables, a hit to your wallet.
Another tip for buying veggies: Buy them at peak season. If you buy tomatoes or other produce when they’re off season, you’re likely to pay more.
“If you shop seasonally, you can save 25% to 30%,” said Martino of Third Wave Strategies.
Look for ugly produce
Look at the day-old produce racks or produce outlets in your area to save.
There are also “ugly” produce sellers online such as Imperfect Foods and Misfits Market that buy and resell quality fruit and vegetables that grocery stores have rejected at steep discounts.
“Why not pay half price for slightly-dinged produce?” Dworsky said.