The 2020 tax extension: What everyone needs to know

Chances are you've heard your taxes weren't due yesterday. The IRS has extended the deadline for filing your 2020 tax return until May 17, 2021.

So you're free to kick back and relax for another month.

Or are you?

Some people may still be on the hook to submit some things on time. Let's look at everything you need to know about income tax filing this year.

Why did the deadline shift?

“The tax extension was truly necessary to allow tax professionals and tax providers to incorporate the tax law changes mid-season and help taxpayers to maximize their benefits under both pieces of COVID relief legislation," says Debbie Todd, a CPA, and CFEI for more than 20 years, CEO of iCompass Compliance Solutions LLC, and cofounder of Dollars and Good Sense Foundation.

For example, taxpayers will be able to claim their increased stimulus payments, including additional benefits for children and other eligible dependents. Businesses will have time to get necessary clarification on the deductibility of 2020 expenses and forgiveness criteria for Paycheck Protection Program (PPP) loans. Businesses can also claim payroll tax credits and modify employee retention tax credits in order to ramp up their re-hiring processes.

There's a lot going on for 2020 taxes, and the extension lets everybody ensure they've got it all sorted out before filing.

Were you supposed to pay something on April 15?

April 15 was still the deadline to submit estimated taxes, so self-employed people still had some filing to do.

Additionally, if you have earnings from interest, dividends, rent, and alimony, you'll likely need to send in some tax payments.

Taxpayers in some states were expected to file their state taxes by April 15; see below for more information.

Everyone else gets a little breathing room and can wait until May 17 to file and pay their taxes.

What if you missed the deadline to Pay?

If you were supposed to pay something on April 15—such as an estimated tax payment—your best course of action is to send in what you owe as soon as you can.

You may end up with a penalty for the late submission, but that's a better outcome than the interest and penalties that will rack up if you delay submission any longer.

Should you file taxes earlier than the extended deadline?

Millions of families had lower 2020 taxable income than they did in 2019 due to layoffs or reduced hours. If this is the case for your family, you might receive a bigger stimulus payment in your taxes through the Recovery Rebate Credit calculation. The average individual tax refund last year was more $3,000 — this year it's likely to be higher.

“If you are one of the lucky folks expecting some money back from Uncle Sam, the sooner you file, the sooner you will get that cash in hand," says Megan Brinsfield, CPA and director of foolish financial planning at Motley Fool Wealth Management.

The way to get your payment soonest of all is to e-file your taxes and provide direct deposit information rather than sending paper forms and waiting for a check in the mail.

How does this extension affect state taxes?

The vast majority of states are opting to follow the federal tax deadline of May 17. Things are changing quickly, however, and some states are going their own way. Hawaii and New Hampshire have announced that they are not extending their tax deadline to match the federal taxpayers in those states are still on the hook to file on April 15.

It's important that you check with your state's Department of Revenue or your tax preparation professional to confirm your situation. The AICPA is maintaining an up-to-date reference for state deadline guidance.

What if I can't file by May 17?

With taxes and finances so changeable and complex this year, it's possible even the May 17 deadline will feel too soon for you.

If that's your case, you can seek an extension to file, but be aware that if you owe any taxes, you still have to pay by May 17. If you file an extension and still owe, make a guesstimate of what you need to send to both federal and state tax authorities, and submit the payments by May 17.

“Time is what individuals who do not have their documents organized need the most" to make sure their tax return is correct and complete, says Anne Chan, CEO and director of tax ops at Mytaxteam. “Accuracy is key when filing your tax return especially for 2020 with many individuals on unemployment and having received COVID relief through grants, PPP, EIDL. [Taking your time] will ensure you are receiving all the credits and deductions you're eligible for."

In this difficult time for many families, getting all those credits and deductions is vital. Consider working with a tax professional to ensure that you're submitting everything when you should — and getting everything you're owed.