Whether it’s a global pandemic shutting the economy down for months, a stock market crash that terrifies investors or a housing industry slide that makes real estate a risky bet, living through tough economic times is never easy. But how you handle yourself and your money during a crisis can make all the difference. If you do it right, you could emerge stronger, wiser and richer on the other side.
If your income is uncertain, it can be hard to predict how much you might owe the IRS or how you can make those payments. And if you’re self-employed or a gig worker, this economic uncertainty can be even greater. So what can you do about your taxes when the economy takes a downturn? Here are some tips to make tax time less taxing when a crisis hits.
- Research filing extensions and be aware of new deadlines. During a period of economic turmoil, tax filing deadlines may be extended or relaxed. Do your homework and see how much time you really have. In the wake of the COVID-19 pandemic, the IRS extended the normal tax filing deadline to July 15, and many state and local governments followed suit. The same may happen in future crises, and it never hurts to find out for sure.
- File promptly if you’re expecting a refund. Getting extra time to file can be a welcome relief if you owe money to the IRS. But if the government owes you, it makes sense to file as quickly as possible. The processing of tax refunds is often disrupted during a crisis, due to short staffing and different procedures suddenly in place. The sooner you file, the sooner you will have your tax refund money.
- File promptly even if you’re NOT expecting a refund or might owe back taxes. The IRS is starting to enforce collections again, but they’re not oblivious to the financial crisis that many Americans are experiencing. The unemployment rate recently jumped to almost 15% — the highest unemployment rate since the Great Depression. And the outlook is uncertain. The IRS will likely consider settlements and more favorable terms to taxpayers in trouble, especially if their income drastically decreased due to COVID-19. So it’s important to file your taxes and be current in order to explore tax relief options.
- Use investments to cover the amount you owe. It’s easy to feel depressed when the stock market is reaching new lows every day. That’s why engaging in strategic tax loss harvesting could reduce your tax bill substantially when filing season rolls around. Tax loss harvesting is when you sell investments at a loss in order to reduce your tax liability. If you have investments that have not worked out as you’d hoped, selling them now and locking in the loss can be a great way to offset capital gains and lower your taxable income. As always, this is general guidance for informational purposes only. Be sure to consult your tax advisor for advice specific to your situation.
An economic crisis can make tax time even more difficult. That’s why it’s critical to have the right CPAs in your corner. Reach out to the experts at Magone & Co at (973) 846-8265, and we’ll schedule a no-obligation confidential consultation to explain your options.