Feb
27
2024
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What Is Disposable Income?

By | Budgeting & Goals, Terminology | No Comments

Here’s the definition of disposable income: It’s the amount of money you have available to spend or save after your income taxes have been deducted.

You may also hear this sum of money called disposable earnings or disposable personal income (or DPI). Another interesting fact: Disposable income is carefully watched by economists because it is a valuable indicator of the economy’s health.

What’s more, as you may realize, disposable income is the basis of your own personal budget. It’s an indicator of your financial status as well as the foundation for deciding how to spend and save your cash.

Key Points

•   Disposable income refers to the money available for spending or saving after income taxes have been deducted.

•   It is an important indicator of an individual’s financial status and is used to determine how to allocate funds.

•   Disposable income is different from discretionary income, which takes into account essential expenses.

•   Calculating disposable income involves subtracting taxes and other mandatory deductions from gross earnings.

•   Budgeting disposable income involves tracking spending, setting goals, and allocating funds for basic living expenses, discretionary spending, and saving/investing.

What Is Disposable Income?

Simply put, the disposable income definition is money you have left over from your earnings after taxes and any other mandatory charges are deducted.

This money (which may also be referred to as expendable income) can then be spent or saved as you see fit. You will likely use it for your basic living expenses, or the needs in your daily life, such as housing, utilities, food, transportation, healthcare, and minimum debt payments.

You may also spend that money on the wants in life, such as dining out, entertainment, travel, and non-vital purchases, such as a cool new watch or mountain bike.

Your disposable income can also be allocated towards your goals, such as saving for your child’s college education, the down payment on a house, and/or retirement.

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Why Disposable Income Is Important

There are different types of income, and disposable income is usually defined as the amount of money you keep after federal, state, and local taxes and other mandatory deductions are subtracted from gross earnings. Consider these details:

•  Mandatory deductions include Social Security, state income tax, federal income tax, and state disability insurance.

•  Voluntary deductions, such as health benefit deductions, 401(k) contributions, deductions for other employer-sponsored benefits, as well as any assignments of support (such as child support) are excluded from the calculation. These costs are considered part of your disposable earnings.

•  Disposable income is an important number not just for consumers, but also the nation as a whole. The average disposable income of the country is used by analysts to measure consumer spending, payment ability, probable future savings, and the overall health of a nation’s economy.

•  International economists use national measures of disposable income to compare economies of different countries.

On an individual level, your disposable income is also a key economic indicator because this is the actual amount of money you have to spend or save.

For example, if your salary is $60,000, you don’t actually have $60,000 to spend over the course of the year. Federal, state, and possibly other local taxes will be deducted, as will Social Security and Medicare taxes.

What is left over is what you would have to spend on everything else in your life, such as housing, transportation, food, health insurance and other necessities.

Of course, that doesn’t mean you should spend all of your disposable income. Another thing to consider is disposable vs. discretionary income. This will tell you actually how much money you have to play with.

Recommended: What’s the Difference Between Income and Net Worth?

Disposable Income vs. Discretionary Income

Although they’re often confused with one another, disposable income is completely different from discretionary income.

While disposable income is your income minus only taxes, discretionary income takes into account the costs of both taxes and other essential expenses. Essential expenses include rent or mortgage payments, utilities, groceries, insurance, clothing, and more.

Discretionary income is what you can have leftover after the essentials are subtracted. This is what you can spend on nonessential or discretionary items.

Some costs that fall under the discretionary category are dining out, vacations, recreation, and luxury items, like jewelry. Although internet service and your cell phone may seem like necessities, these expenses are considered discretionary expenses.

Similarities

Both disposable and discretionary income are a way of looking at income after taxes.

However, discretionary income goes a step further and deducts essential expenses, such as housing and healthcare.

Differences

As you might expect, discretionary income is always less than disposable income. When you subtract discretionary income from disposable income, the amount that remains is how much you can put towards wants (fun spending) and savings.

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Calculating Disposable Income

Disposable income refers to the amount of earnings left over after mandatory federal, state and local deductions. But disposable income is not necessarily the same as your take-home pay.

Deductions from your paycheck may include additional items such as health insurance, retirement plan contributions, and health savings accounts. These deductions are voluntary, not mandatory.

To calculate your disposable earnings, you can simply subtract federal, state and local taxes, Medicare, and Social Security from your gross earnings. Be sure to include any passive income streams, such as rental income, or side hustle earnings (more on that in a moment), when doing the math for your gross income. The resulting amount is your disposable income.

How to calculate disposable income

Some of the finer points to note:

•  You may want to keep in mind, however, that taxes deducted from your paycheck are an estimate. If you have a history of getting a large refund or having a large amount of taxes due, it may be worth reviewing your withholdings through your employer.

This could help you adjust the withholdings so it is closer to the actual expected tax that will be calculated when you file. You can then plan accordingly.

•  Even if you’re a contractor or freelancer, or if you made additional income from side gigs along with your salary, you can still calculate your disposable income.

This requires subtracting your quarterly tax payments and any additional taxes you will owe from your overall income. You can then determine your monthly after-tax income.

Setting aside money to pay taxes can also help you budget with your disposable income.

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Disposable Income Budgeting

Calculating your disposable income is a key first step in preparing a budget. You need to know how much you have to spend in order to plan your monthly spending and saving.

A personal budget puts you in control of your disposable income and helps you make financial decisions. It forces you to take a closer look at how you’re spending your money.

Here are a few ideas that could be helpful when developing a budget based on disposable income.

Tracking Spending

Disposable income is what’s coming into your account every month. It’s a good idea to also determine what is going out each month.

To do this, you can gather up bank and credit card statements, as well as receipts, from the past three months or so, and then list all of your monthly spending (both essential and discretionary/nonessential).

To make this list more accurate, you may want to actually track your spending for a month. You can do this with a phone app (your bank’s app may include this function), by carrying a small notebook and jotting down everything you buy, or by saving all of your receipts and logging it later.

This can be an eye-opening exercise. Many of us have no idea how much we’re spending on the little things, like morning coffees, and how much they can add up to at the end of the month.

Once you see your spending laid out in black and white, you may find some easy ways to cut back, such as getting rid of subscriptions and streaming services that you rarely use, brewing coffee at home, cooking more and getting less take-out, or getting rid of a pricy gym membership and working out at home.

Setting Goals And Spending Targets

Tracking income and spending can provide a great starting point for setting financial goals and spending targets.

•  Goals are things that a person aims for in the short- or long-term — like paying off student loans or buying a new car.

•  Spending targets are how much you want to spend each month in general categories in order to have money left over to put towards your savings goals.

Since essential spending often can’t be adjusted, spending targets are typically for discretionary income.

One option for budgeting disposable income is the 50/30/20 plan. This suggests spending about 50% on necessities, 30% on discretionary items, and then putting aside 20% for savings and other long-term goals.

Use the 50/30/20 budget calculator below to see how your budget would fall into those three categories.


These percentages are general guidelines, however, and can be adjusted as needed based on individual circumstances. For example, if you live in a competitive housing area, rent may take up a larger portion of your expenses, and you may have to bump up necessity spending to 60% and decrease fun money to 20% instead.

Or, if you are saving for something in the near term, like a car or a wedding, you may want to temporarily bump up the savings category, and pull back unnecessary spending for a few months.

3 Uses for Your Disposable Income

Once you have calculated your disposable income, you can consider the ways you might divide it up:

Basic Living Expenses

Some of your disposable income will go towards necessities, such as:

•  Housing

•  Utilities

•  Food

•  Healthcare

•  Transportation

•  Insurance

•  Minimum debt payments.

Discretionary Spending

Next, there are the wants in life. These are things that are not vital for survival but can certainly make things more enjoyable:

•  Eating out

•  Entertainment, such as streaming platforms, movies, concerts, and books

•  Clothing that isn’t essential (like winter boots)

•  Electronics, like the latest mobile phone

•  Travel

•  Gifts.

Saving and Investing

In addition to the spending outlined above, you will likely want to save money or invest it for your short-term and/or long-term goals. These may include:

•  Your emergency fund

•  The down payment for a house

•  A college fund for children

•  Money to start your own business

•  A new car

•  Retirement.

Recommended: Get a personalized estimate for your emergency fund by using our emergency fund calculator.

Opening a Savings Account With SoFi

Disposable income is a key concept in budgeting, as it refers to the income that’s left over after you pay taxes. Knowing how much disposable income you have is the foundation for putting together a simple budget that allows for necessary expenses, having fun, while also saving for the future. Finding the right banking partner is another important element of planning for tomorrow.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


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FAQ

What does disposable income mean?

Disposable income (or what may be known as disposable earnings) is the money you have left after taxes and other mandatory deductions are taken out of your income.

What is an example of disposable income?

An example of disposable income would be a $100,000 gross salary, minus $30,000 in taxes and $15,300 in Social Security and Medicare deductions. The remaining $54,700 is disposable income.

What is the difference between disposable income and discretionary income?

Disposable income refers to earnings minus taxes and mandatory deductions, such as Social Security and Medicare. Discretionary income is a subset of disposable income. It is the money left once you have paid for essentials, such as housing, utilities, food, and healthcare. The money that is left can be used for non-essential spending and for saving.


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As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Feb
14
2024
The Facts About Getting Audited: Woman writing in notebook

What Happens When You Get Audited?

By | Family Finances, Life & Career, money | Comments Off on What Happens When You Get Audited?

What is it about the words “tax audit” that so many people find so anxiety-provoking? The idea that the Internal Revenue Service (IRS) could be poring over your tax return can be downright nerve-racking, not to mention the possibility of mistakes found and penalties incurred.

But take a deep, calming breath: Over the last decade, the IRS audit rate has been declining. In 2022 (the most recent data available), the odds of an audit were 3.8 out of every 1,000 returns filed (0.38%), a slight decline from tax year 2021, when the odds of audit were 4.1 out of every 1,000 returns filed (0.41%).

But even so, you likely want to do your best to avoid going through that process. This is an informative, high-level overview of IRS audit triggers, and it should not be considered tax advice. It’s always worth consulting a tax professional for any questions or concerns because taxes are complicated and highly personal.

Read on to learn:

•   What is an audit?

•   What are reasons why someone may get audited?

•   What should you do if you get audited by the IRS?

What Is a Tax Audit?

A tax audit is a process by which the IRS reviews an individual’s or organization’s accounts as well as their financial details to make sure that the information submitted has been reported correctly and in keeping with the prevailing tax laws.

The IRS usually sends a letter when it reaches out to ask for more information, and the letter should let you know specifically what the agency is looking for.

You shouldn’t ever receive a text, email, or phone call from the IRS asking for personal or financial information. If you do, the IRS website offers several steps for checking out and reporting any suspicious contact .

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Reasons Why Someone May Get Audited by the IRS

Here’s a closer look at some of the typical IRS audit triggers. Knowing them can help you understand and possibly avoid the process as you work your way through tax season.

•   You’re a high earner. In 2022, the odds that a millionaire was audited by the IRS was 1.1 percent — higher than the average audit rate. If you are a high earner, it may be worthwhile to work with an experienced CPA to ensure you file precisely. You may also want to investigate ways to lower taxable income for high earners.

•   You claimed the Earned Income Tax Credit. The Earned Income Tax Credit, or EITC, is a provision that helps lower- and moderate-income workers and their families receive a tax credit. This can reduce the taxes owed or possibly increase a refund. However, research indicates that those who claim the credit are audited at a higher rate than average, perhaps because the IRS wants to be sure the credit is being used appropriately.

•   You failed to report all your income. When you are issued a W-2 form or 1099 form showing your earnings, the IRS receives a copy too. If your return doesn’t reflect the same figures that they have when they perform a cross-check, you could wind up being audited.

•   You didn’t report all of your stock trades. When you sell stock shares, the funds you receive are taxable unless the investments happen to be a retirement account that is tax-deferred. Both you and the IRS will be sent a particular kind of 1099, a Form 1099-B, reflecting activity, and you will have to report your capital gains and losses when you do your tax return. The tax rate will depend on how long you have held the investment, but it’s important that these transactions be reported and paid up when you file your return.

•   You claim large charitable contributions. If you claim tax deductions for charitable donations of cash or items, it’s important to keep records and receipts. For a donation of cash or goods worth more than $250, the IRS requires you to get a written letter of acknowledgment from the charity by the date you file your taxes. If you’ll deduct at least $500 in donated items, you need to fill out Form 8283. For any items worth more than $5,000, you must attach an appraisal of the item to the form. Large and unsubstantiated contributions can be problematic.

Recommended: Tax-Deductible or Not? Your Guide to End-of-Year Donations

•   You claim a home office. If you are self-employed, you may deduct a percent of your rent, phone bills, and other work-related costs on Schedule C of your return. Another option is to deduct $5 per square foot of space used for business, up to $1,500. However, the IRS has over the years been successful in minimizing this home office deduction on returns, especially since the home office must be for the exclusive purpose of work; it can’t double as, say, a guest room. This means it can be an audit risk to take this on your return.

•   You claim that your car is only used for business. This is another audit red flag. If you are self-employed and depreciate a car on Form 4562 and claim that it’s used for business 100% of the time, you may well be stretching the boundaries of believability. Because it’s unusual that a vehicle wouldn’t also be used for personal transportation, you may trigger an audit with this 100% figure. It can be important that tax deductions for freelancers aren’t too large versus income.

•   You accept cash transactions. If you work in the kind of business where you often get paid in cash, especially large amounts, your return may receive extra scrutiny. The IRS requires individuals and businesses to report cash transactions over the sum of $10,000. Banks must also report potentially suspicious transactions involving cash (for instance, if someone deposits $9,500 in cash one day and $700 the next, thereby skirting the $10,000 reporting threshold).

•   Your business regularly shows losses. Of course, not all businesses are always profitable. But if you’ve started an enterprise and it keeps showing losses, year after year, it might be what triggers an IRS audit. It could look as if you have established this endeavor simply as a way to benefit from some tax deductions. The same can hold true if your business is barely break-even.

Recommended: Tax Loss Carryforward

•   You claim lots of travel and entertainment deductions. What else can trigger a tax audit? Here’s another one for self-employed workers: If you claim a lot of restaurant dinners, travel, and shows as business expenses, you may raise eyebrows at the IRS. This is especially true if the meals and hotels seem more lavish than your business might otherwise qualify for. Save all your receipts and documentation, and know that a high level of these expenses being claimed on Schedule C may get some attention and even an audit.

•   You make errors on your tax return. As you prepare for tax season, you may feel overwhelmed or be in a rush. Or perhaps you’re just not the most detail-oriented person on the planet. But if you make math mistakes on your return or, say, round up numbers to the nearest $10 or $100 because you can’t be bothered with change, heads-up: You may put yourself in line for an audit. Precision and specificity do count.

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A Few Facts About Tax Audits

Here are a few points to be aware of on the topic of IRS tax audits. They may clarify some concerns that are on your mind.

A Compliance Contact Isn’t Always an Audit

A compliance check is a review done by the IRS to ensure that a taxpayer is adhering to the requirements for recordkeeping and information reporting. It does not relate directly to whether or not a person owes taxes.

There Are Different Types of Audits

Just as there are different kinds of taxes, so too are there different kinds of audits. If you are being audited by the IRS, there are a couple of ways this may happen. Mail audits are fairly common; in these, you mail in documents in response to specific inquiries. Office and field audits are more serious, and the IRS asks for proof of credits and deductions, and may look at your financial records more carefully to see if your tax return is correct. The IRS may be looking for tax evasion on these kinds of audits. The third kind of audit is what’s known as a CP2000 notice. Technically, this isn’t an audit but an underreporter inquiry, and is likely about a discrepancy between your return and the tax documents that were filed with them for the tax year in question.

Some Groups Face Higher Audit Rates than Others

While audit rates have dropped for all income levels, those with incomes below $25,000 and above $500,000 are audited at higher rates than the average.

Good Record Keeping May Offer Protection

If you are audited, it can be very helpful if your records are in good order. That way you can explain the amounts you reported and easily answer questions the IRS may have. This can serve as a good incentive for you to keep your records diligently going forward.

Ignoring the IRS Could Be Costly

What happens when you get audited can of course vary. But one possibility if you are audited is that you may be liable for back taxes not paid and penalties. These penalties typically accrue over time, so the longer you go without paying them, the higher they can be. That’s why it’s a good reason to respond promptly if you do get audited.

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What to Do if You Get Audited

What if you are one of those few people who is told that your returns are being reviewed? This is what to expect and what to do if you get audited by the IRS:

•   Typically, you will get a letter from the IRS in the mail that will identify an issue (such as your reporting less income than their records show you earned) and requesting a response.

•   It’s wise to gather your documents so you can make your case. It can be smart to send your reply as a clear, concise statement of what your documentation shows and share those records to help prove your point.

•   One important thing to do when you get audited is to reply in a timely manner and make sure your reply gets where it’s going. It can be a wise move to use additional mail services to ensure you have proof of delivery.

•   If you worked with a CPA or an enrolled agent on your return, they can likely advise you. If you used tax-return software, they may also offer help.

•   Your response to the mail inquiry may be enough to resolve the situation. Or the IRS may have additional questions for or requirements of documentation for you. If things escalate to a face-to-face meeting, you may want to have a tax professional work with you and accompany you for guidance and support.

•   Whether it’s a correspondence exam or an in-person audit, you’ll get a printed list of specific records the IRS wants to see. If your audit is being managed by mail, you may be able to send the documents electronically or by mail. (Be sure to get a receipt for delivery.) Note the IRS will generally accept copies and they caution against mailing original documents in. If it isn’t possible to send the documents, you can request an in-person meeting.

•   If you need more time to respond to a correspondence exam, you can fax or email a request for an extension using the contact information in your IRS letter. Or, if you’re being asked to comply with an in-person exam, you can contact the auditor assigned to your case to request an extension.

•   Also worth noting: If the IRS finds discrepancies in your return, it may review returns from up to the last six years to better assess what the situation is.

The Takeaway

No one can guarantee a return won’t be audited by the IRS — even if you aren’t doing any of the things most experts say might put you at higher risk. But if you’re honest about your income and your deductions, keep organized and complete records, take care to enter all information accurately, and double-check your work, you may be able to avoid major problems should you get audited.

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FAQ

Are audits always negative?

While IRS audits make most people sweaty-palmed, they can be as simple as answering some questions by mail. They are not necessarily as scary as you may think.

How do I know that I am being audited?

If you are being audited, you will be notified, most likely by mail, by the IRS.

What happens after an audit is conducted?

After an audit is conducted, you will be told the outcome. You may be told you owe taxes and penalties or not. If you are assessed additional taxes and fees, you can complete paperwork and pay them if you agree with the findings. If you don’t, you can contact the auditor to discuss and request a review of the findings. If necessary, the matter can be escalated to Alternative Dispute Resolution (ADR) or you can file an appeal with the IRS Appeals Office.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Feb
14
2024
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The Fastest Ways to Get Your Tax Refund

By | Budgeting & Goals, Family Finances, money, Money & Life | Comments Off on The Fastest Ways to Get Your Tax Refund

Learning that you are eligible for a tax refund can be a welcome surprise. Or maybe it’s something you’ve been hoping (or even waiting for) for months.

If you have any pressing expenses — maybe you’re behind on a few bills or have been putting off going to the dentist because of the cost — you may be wondering how you might be able to get that money into your hands ASAP.

Fortunately, there are a few simple things any taxpayer can do to help ensure that their refund comes quickly.

This includes e-filing with the IRS (rather than physically mailing in your return) and setting up direct deposit, so there’s no waiting for that refund check to come through the mail.

Read on to learn more about getting your tax refund sooner, including:

•   How to plan your tax return filing

•   How to file electronically

•   How to set up direct deposit

•   How to track your refund

Quickest Ways to Get Your Tax Refund

Here are some key steps you may want to take as tax season gets underway, starting well before Tax Day in April. They’ll help ensure that you get your refund ASAP.

💡 Quick Tip: An online bank account with SoFi can help your money earn more — up to 4.00% APY, with no minimum balance required.

1. Start Planning Your Tax Return Filing in January

In general, the fastest way to get your tax refund is to file your taxes early, and you certainly don’t want to miss that tax-filing deadline.

This means that, starting in January, you may want to begin collecting all the necessary information for filling out your tax forms, such as your W-2 and any 1099s. You’ll also likely need to decide whether you are going to file on your own (perhaps using tax software) or hire a tax preparation service or accountant to help.

2. Get Your Return in ASAP

The further into tax season that you file, the more likely the IRS is to be inundated with returns. That can slow processing times, which can delay your refund.

If you followed Step 1, above, then you’ll have your documentation organized. All of the forms you need should be issued by January 31.

If you prefer working with a professional tax preparer, it’s wise to book them in advance, since they’ll likely be very busy with other clients. If you plan to use tax software, buy it early and learn how to use it. You’ll be ready to be one of the first filers out of the starting gate.

3. File Your Tax Return Electronically

One of the fastest ways to get your refund can be to choose electronic filing instead of sending your return by mail.

That way, your refund can begin moving through the system immediately, rather than having to wind its way through snail mail and hands-on processing.

A paper tax return can take about six to eight weeks to process, but with electronic filing, or e-filing, taxpayers can typically expect to receive their refund within 21 days. Your tax preparer will usually offer ways for you to file electronically.

Taxpayers can also use tax preparation software such as TurboTax, TaxSlayer, TaxAct, or H&R Block. You can use these programs to file your taxes yourself, or you might go to a professional who knows how to use this type of software. Either way, electronic filing is probably an option.

4. Get Help Filing Your Return Quickly

But what if you don’t have funds for tax help and are feeling overwhelmed by the process and therefore don’t file right away? Fortunately, help is available. The Internal Revenue Service (IRS) offers a few options for
e-filing which can help you get this task completed.

If taxpayers make an adjusted gross income (AGI) of $79,000 or less per year, then they can use IRS Free
File to turn in their tax forms.

For taxpayers whose AGI is greater than $79,000, they can use the IRS’s Free File Fillable Forms service, which lets you simply input your data onto your tax forms so you can e-file (if you choose this option, you’ll need to know how to prepare your own tax return).

The IRS Volunteer Income Tax Assistance (VITA) and the Tax Counseling for the Elderly (TCE) programs also provide help and e-file for taxpayers who qualify.

Most states also offer free e-filing options for state returns.

The IRS has a helpful tool on their website where taxpayers can find an authorized IRS e-file Provider
Locator . All taxpayers have to do is input their zip code and choose what kind of provider they need.

5. Set Up Direct Deposit

How else to get your refund fast? The speediest way to get your tax refund is to have it electronically deposited into your financial account. This is known as direct deposit, and the service is free. It’s also possible to break up your refund and have it deposited into one, two, or even three accounts.

You can set up direct deposit simply by selecting it as your refund method through your tax software and then inputting your account number and routing number (which you can find on your personal checks or through your financial institution).

Or, you can tell your tax preparer that you want direct deposit.

It’s also possible to select direct deposit if you’re filing by paper and sending your return through the mail (you may want to double check to make sure you didn’t make any errors inputting your financial account information). But remember, paper returns tend to move through processing more slowly.

💡 Quick Tip: As opposed to a physical check that can take time to clear, you don’t have to wait days to access a direct deposit. Usually, you can use the money the day it is sent. What’s more, you don’t have to remember to go to the bank or use your app to deposit your check.

6. Open a Bank Account If You Don’t Have One

If you just read the step above and thought you can’t use direct deposit because you don’t have a bank account, this could be the moment to set one up. Perhaps you haven’t gotten around to opening a checking or savings account. Now is a great moment to open one. Many online banks can guide you through the application and opening process online, from your home, in a minimal amount of time. This can be an excellent move as you prepare for tax season.

If you were previously turned down for a bank account, you might want to look into what are known as second chance accounts. Offered by some banks and credit unions, these may not have all the features of conventional accounts, but they can give you a good landing pad for your tax refund via direct deposit.

Recommended: What Are the Different Types of Taxes?

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When Can I Expect My Tax Refund?

As long as taxpayers have e-filed by the deadline and chosen direct deposit, then the refund should hit their account within three weeks. According to the IRS, nine out of 10 refunds arrive in less than 21 days. However, if you file a paper return, the timing will more likely be six to eight weeks.

And, remember, if you file later in the tax season, you might face processing delays. That’s because the volume of returns working their way through the IRS rises significantly. So being an early bird can be among the quickest ways to get your refund.

Recommended: What Is Income Tax Withholding?

Finding Out Where Your Refund Is

Once everything is filed, taxpayers can check their tax refund status on the IRS’s Where’s My Refund? page. This requires inputting your Social Security number, filing status, and the exact amount of the refund, which can be found on the tax forms that were submitted.

Can I Track the Status of My Tax Refund?

Taxpayers can check “Where’s My Refund?” starting 24 hours after e-filing.

The site is updated daily, usually at night. The IRS cautions that you may experience delays in getting your refund if you file by mail, or you are responding to a notice from the IRS.

If it’s been more than 21 days and you still haven’t received your refund, you can call the IRS at (800) 829-1040 for help. You may also want to contact the IRS if “Where’s My Refund?” instructs you to do so.

Can You Get Your Tax Refund Back the Same Day?

Unfortunately, there is currently no way to get a tax refund back the same day. The speediest timing tends to be closer to eight days from e-filing to direct deposit of a refund.

However, if taxpayers are in a bind, some tax preparation services offer 0% interest tax-refund loans. Tax-refund loans, also called “refund advances,” allow you to access your refund early, but you may want to keep in mind that tax preparers typically charge fees for filing tax returns.

If you are paying a tax preparer just to get the advance, you’ll essentially be paying a company in order to access your refund. Consider these points:

•   Some providers may charge an additional fee for the advance service.

•   These short-term loans range from $200 to $4,000. In some cases, there may be a minimum amount your refund must meet in order to qualify for a refund advance (how much can vary from one company to another).

•   You may only get part of your expected refund in advance.

•   Some companies may offer to give you a prepaid card with the loan amount on it within 24 hours.

•   Once your tax refund is issued, the tax preparer will typically deduct the loan amount from your refund.

Also be aware that you may be offered this kind of quick cash from other non-bank lenders with significant fees. Proceed with caution.

If you’d rather not pay any fees, however, you may also want to look into other options.

•   If you have bills that are due, it may be worth calling up your providers or credit card companies to see if they can extend their due date while you are waiting for your refund.

•   You might open a 0% interest credit card, such as a balance transfer one, and charge an urgent expense on that card and then pay it off as soon as the refund comes in.

What’s the Best Way to Spend Your Tax Refund?

Finally! Your tax refund has arrived. You may wonder about the best way to use the funds. Yes, it can be tempting to splurge on a weekend away or those new boots you’ve had your eye on, but consider this financially-savvy advice first:

•   If you are carrying any high-interest debt, one smart move might be to put your tax refund towards minimizing the debt or, if possible, wiping it out all together. Doing this can help you avoid spending more money on interest charges. It may also help boost your credit score, which may help you qualify for loans and credit cards with lower interest rates in the future.

•   Or you might consider using your tax refund to jump-start one of your current savings goals, such as building up an emergency fund, a downpayment on a home, or buying a new car.

For an emergency fund or savings goals you hope to accomplish within the next few years, you may want to put your refund in a high-yield savings account. These options typically offer a higher return than a traditional savings account but allow you easy access to your money when you need it.

•   Your tax refund can also help you start saving for the longer term, such as retirement or paying for a child’s education. Using a tax refund to buy investments can help you create additional wealth over time to help fund these far-future goals.

The Takeaway

To get your tax refund as quickly as possible, it’s a good idea to file early, and, if possible, avoid the mail. That means filing electronically (using the IRS’s free service or tax software, or hiring a tax pro) and signing up for direct deposit when you file.

It’s also wise to keep track of your refund on the IRS site and reach out to the agency if you haven’t received your refund within three weeks.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

How can I receive my tax refund sooner?

To receive your tax refund as soon as possible (which typically means within three weeks of filing), file electronically and request that the refund be paid by direct deposit.

Is direct deposit faster than mail for tax refunds?

Direct deposit will typically save time versus a check sent by mail in terms of tax refunds. If you file your return electronically too, you’ll likely have the shortest possible time from finishing your return to receiving funds that are due to you.

When should you start planning to file your tax return?

Tax season begins in January, with the forms you need having to be sent by January 31. It’s wise to start getting organized as soon as possible in the New Year to get your return done. If you work with a professional tax preparer, you might want to book them even earlier since January through April will be their busy season.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Feb
12
2024
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What Happens If I Miss the Tax Filing Deadline?

By | Budgeting & Goals, Financial Independence, money | Comments Off on What Happens If I Miss the Tax Filing Deadline?

If you miss the annual deadline for filing your income taxes, you don’t necessarily need to panic. Missing that tax filing deadline may not mean a big penalty, and you may have more options than you think. However, it can be wise to take steps to remedy the situation as soon as possible.

For 2023 tax returns, the deadline is set for April 15, 2024. If you’re wondering what might happen if you miss that date, read on. You’ll gain insights and steps to take, including:

•   Reasons why someone may miss the tax-filing deadline

•   What are the penalties for missing the tax-filing due date

•   How tax extensions work

•   What deadlines mean if you’re owed money

•   How to get your taxes in on time

•   How to file a late tax return

When Is the Tax Filing Deadline?

Usually, the tax-filing deadline is April 15 for the prior year. So if you are filing your return for tax year 2023, April 15 of 2024 would be the due date.

Worth noting: If April 15 falls on a weekend or holiday, the next business day is used. In the case of 2023, April 15 fell on a Saturday, but on Monday, April 17, the Emancipation Day holiday was observed in Washington, D.C. For this reason, the federal tax-filing date was actually on Tuesday, April 18, that year.

💡 Quick Tip: Banish bank fees. Open a new bank account with SoFi and you’ll pay no overdraft, minimum balance, or any monthly fees.

Reasons Why Someone Might Miss the Tax Filing Deadline

Turning in school papers, paying your credit card bill, applying for rebates: Life is full of deadlines that sometimes are missed. Missing the deadline for taxes is no exception. Here are some common reasons why people don’t file on time:

•   You think you don’t owe any money and figure, why bother to file?

•   You think you do owe money but can’t afford to pay your tax bill, so you avoid it entirely.

•   You are missing tax documents and didn’t have time to hunt for them or know where to find them.

•   You ran out of time to get organized and file or simply procrastinated.

•   You had trouble understanding taxes, got stressed out by the process, and didn’t get it finished.

•   You couldn’t afford a tax preparer but realized you didn’t know how to file on your own.

•   You got sick or injured or had a family emergency that interfered with filing.

•   You had a change in status (i.e., were in the middle of a divorce or became widowed) and didn’t know how to file in those new circumstances.

Recommended: How to Wire Money

Are There Penalties for Missed Tax-Filing Deadlines?

“What happens if I miss the tax deadline?” you may wonder. The answer is: It can cost you. For individuals, the IRS can levy penalties for a few infractions related to the annual tax filing deadline. Here’s a closer look:

The most common punishment for this offense is a late payment penalty that’s equal to 0.5% of the money owed. But it’s important to be aware of these finer points:

•   The IRS can penalize a taxpayer for “failure to file,” which occurs when a person fails to file their tax return by the appropriate April date or by the date specified if the person requests and receives an extension. The IRS can levy a penalty of 5% of the taxes owed per month for each month that the taxes are owed after the April filing deadline passes if you didn’t get an extension. This hits a cap of 25% after five months and can’t go any higher.

•   Another infraction when missing the tax deadline is “failure to pay.” This occurs when a taxpayer doesn’t pay the money they owe on their tax return, even if they file on time. The most common punishment for this offense is a late payment penalty that’s equal to 0.5% of the money owed. That may not sound like much, but it’s due every single month, until the tax is paid in full. And that penalty can be as much as 25% of the overdue taxes.

•   What if both “failure to pay” and “failure to file” penalties are applied in the same month? In this case, the “failure to file” penalty will be lowered by the sum of the “failure to pay” penalty applied that month.

•   The IRS can also penalize taxpayers for failure to pay estimated taxes over the course of a year. The penalty will be calculated based on the amount of the underpayment, how long the taxes were left unpaid, and the interest rate the IRS charges.

•   Another reason the IRS may charge a penalty is if your check to the government bounces. You will likely be assessed an additional 2% on the amount owed to the government.

One last note: You may wonder what happens if you file just a day or two late. It does matter! Even a single day late counts against you; the IRS takes deadlines very seriously.

Recommended: Tax-Deductible or Not? A Guide to Year-End Donations

How Do Extensions Work?

There are years when completing your taxes by the April deadline is just too much to accomplish. Preparing for tax season and completing a return isn’t always simple. As a taxpayer’s financial life evolves, filing can become quite complex and time-consuming. And even if you use a professional tax-preparer, April can be an extremely hectic time for them, and they may not be able to fit you in before the big deadline.

So what happens if you’re missing the tax deadline? Don’t just sit back. This is when an extension may come in handy.

•   The way to get one is to file an IRS Form 4868 , which is an application for permission to take an extra six months (until October) to file your taxes. Taxpayers, however, can’t be late when requesting the extension. You have to submit the form by the April deadline.

•   You can file for an extension online or by mail.

•   An extension only applies to filing your return. It’s important to note that you still have to send the IRS a check for your estimated taxes by April 15 or whatever the due date is in a given year.

•   If you take, say, another month to file the complete return and you owe more than you estimated on Form 4868 in April, you may face penalties for the shortfall.

•   Those penalties will typically grow with each month you take to file, even with the extension.

•   If you overestimate the taxes you owe and pay too much by the April deadline, then you’ll receive a refund after you eventually file.

What Deadlines Mean If You’re Owed Money

All of this discussion about deadlines and penalties ignores one issue: What does all of this mean if you expect to get money back from the government in the form of a tax refund?

A tax refund happens if you overpay your taxes over the course of a year, whether through your regular paycheck deductions, quarterly payments, or other means. When you file your return, it’s a chance to get that money back. Tax refunds are quite common — in terms of 2022 returns filed in 2023, the IRS issued 237.8 million refunds to individuals, totaling about $512 billion.

All of the deadlines and penalties described so far apply to anyone who owes money to the IRS in a given year. For taxpayers who are owed money by the government, the rules are different. Some specifics:

•   There is no late-filing fee for taxpayers who file returns requesting a refund from prior years.

•   The annual tax filing deadlines have a different significance for people who will receive a refund check from the IRS. For these taxpayers, there’s a real incentive to file taxes ahead of the deadline. The sooner you file, the sooner you’re likely to receive your refund. The IRS says it issues roughly 90% of its refunds in under three weeks, though it warns that some returns require additional review and may take longer as a result.

•   After a return is three years overdue, the IRS will no longer pay that money. The good news is that there is no late-filing fee for taxpayers who file returns requesting a refund from prior years.

It may seem unlikely that people would leave money unclaimed, but consider this: The IRS announced that it had more than $1.5 billion in unclaimed income tax refunds due to individual taxpayers who never got around to filing their federal income tax returns in 2019. Those unclaimed funds eventually become property of the U.S. Treasury.

So, as you see, it could definitely pay to file that return.

Tips for Filing a Late Tax Return

If you missed the tax filing deadline or know that’s going to happen, here’s advice:

•   You can file the IRS Form 4868 requesting an extension by the tax filing deadline. Even if you do file for a tax extension, however, know that any funds owed are still due by the April date, but you may be able to send in the actual return later.

•   Always file your return as soon as possible. You may want to contact a tax professional to assist you with this, or you can reach out to the IRS for help. You might want to call the IRS Tax Help Line at 1-800-829-1040 or visit your local IRS office.

•   If you owe money but can’t pay it all at once, pay as much as you can, as soon as you can, and look into available options, such as payment plans with the IRS. These can give you an extended timeframe in which to pay what you owe. You may want to consult the IRS’ online Payment Plan tool.

Tips for Getting Your Taxes in on Time

Now that you’ve read about how complicated it can be if you miss the tax filing deadline, here are a few tips to help you get those returns in on time:

•   Get organized early. Gather all the records you’ll need to file (such as a W-2) as they become available.

•   Check against last year’s return to see if there were any forms you had then (say, a Form 1099 reflecting interest on a bank account) that you don’t have now. Track down anything that’s missing.

•   Create or log into an account at IRS.gov to make tracking your progress easier. You can make payments there, too.

•   Make sure you’ve withheld enough money so that you don’t owe too much when you file. If you do wind up having to pay a significant amount, develop a plan early to pay it on time or as close to on time as possible.

•   Know your banking details or open a bank account so that you can use direct deposit, which is usually the fastest way to get a refund.

The Takeaway

Life happens: Sometimes, despite your best intentions, deadlines get missed. When that happens with tax filing, though, there can be some very real financial penalties involved. That’s why it’s important to know when your tax returns are due and then do everything in your power to file on time.

If you can’t get your return finished by Tax Day in mid-April, know the right moves to request an extension and possibly look into a payment plan for money owed that you can’t pay all at once. Having your bank account information handy, especially when you are due a refund, can be valuable.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

When is the tax deadline?

The deadline for tax-filing is usually April 15 for the previous year’s taxes. However, if that date falls on a weekend or holiday, it will move forward by up to a few days.

How long are the tax extensions given if I miss the tax deadline?

The usual tax extension is six months. However, this is a longer timeline to file your return. Funds owed are still due in April. It can be wise to pay as much as possible towards your total debt to the IRS by Tax Day, and then send the remainder as soon as possible, perhaps via a payment plan with the IRS.

What happens if you miss the tax deadline by one day?

The IRS takes deadlines seriously. For every month that you are late filing your return, you will be assessed a penalty on the total amount owed. That wording of “a month” does not mean the first 30 days after the deadline are a kind of freebie during which you can send in your return and any payment due without penalty. Rather, being even a single day late puts you into that “one month” late category.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Feb
12
2024
How to File a Tax Extension

How to File a Tax Extension

By | Family Finances, Life & Career | Comments Off on How to File a Tax Extension

You can file a tax extension in a few different ways, such as online or by mail. This process can help people who may need more time to finalize their return, whether they are missing documents, dealing with a personal emergency, or have other reasons for being behind schedule.

While a six-month extension can be a good safety net, it’s important to learn the facts. For instance, an extension doesn’t mean you have more time to pay any taxes you may owe.

Read on to learn the facts and important considerations to know when filing a tax extension.

What Is a Tax Extension?

A tax extension extends the deadline for filing your federal tax return by six months. All you have to do to get an extension is request one by April 15, 2024. Here are important points to know:

•   A tax extension does not give you extra time to pay any taxes owed. If you can’t afford to pay your full tax bill, it’s a good idea to pay as much as you can by Tax Day and then apply for an individual payment plan on IRS.gov or call the IRS (Internal Revenue Service) at 800-829-1040 to discuss payment options.

•   The agency may waive the late-payment penalty in a few cases, but it will not waive interest charges on unpaid tax bills. The interest rate is the federal short-term rate plus three percentage points. In early 2024, for individuals, the rate was 8%, compounded daily.

•   The late-payment penalty, aka failure-to-pay penalty (you filed for an extension on time but still owe taxes), is much less severe than the failure-to-file penalty (you didn’t file your tax return by the due date and did not request an extension). The failure-to-file penalty is usually 5% of the tax owed for each month or part of a month that your return is late, up to 25% of the total owed.

Either way, a penalty plus interest on taxes owed past the deadline might be a good incentive for many taxpayers to try to cough up most of their bill on time.

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How Do Tax Extensions Work?

There are three ways to request an automatic extension of time to file your return:

1.    File IRS Form 4868 electronically using your personal computer or through a tax professional who uses e-file. You’ll be asked to provide your prior year’s adjusted gross income for verification purposes. (If you do not know your prior year’s AGI and do not have a copy of that tax return, you can find the information by signing in to your IRS online account.)

2.    Mail a paper Form 4868. (The IRS says, though, not to mail in Form 4868 if you file electronically unless you’re making a payment with a check or money order.)

3.    Pay all or part of your estimated income tax due, and indicate that the payment is for an extension, using Direct Pay or the Electronic Federal Tax Payment System. You can also pay taxes with a credit card or debit card.

Special rules about filing extensions may apply to those serving in a combat zone or a qualified hazardous duty area or living outside the United States.

Recommended: Tax Season 2024 Help Center

Reasons to File for a Tax Extension

Many high earners routinely seek tax extensions because their business dealings and investments can take longer to sort out.
Other people might seek a tax extension for different reasons, such as:

•   Needing extra time to track down missing tax documents, especially if you’re dealing with an extenuating circumstance (for instance, the closure of a place of employment shortly before tax documents were due to be issued).

•   A major unplanned life event interrupts your plans and makes it hard to get things together on time.

•   You’re still figuring out how to do taxes as a freelancer and want to take all the deductions you can.

•   You’re going to take the home office tax deduction as a self-employed person and want to carefully crunch the numbers because you’re skipping the simplified deduction of up to $1,500.

•   General life busyness led to the deadline sneaking up on you.

•   Maybe you’re filing taxes for the first time and you simply procrastinated.

•   You have a primary and second home and are still unsure whether to itemize and take the mortgage interest deduction.

Filing for a Tax Extension Online

Remember, you don’t need to file Form 4868 if you make a payment using IRS electronic payment options or by phone and indicate that you want an extension.

If you do need to file Form 4868, you can do so electronically by accessing the IRS e-file with your tax software or by using a tax professional who uses e-file.

IRS e-file options include Free File, which lets you prepare and file your federal income tax online using guided tax preparation at an IRS partner site (for filers with AGI of $73,000 or less) or Free File fillable forms (for any income level).

Filing for a Tax Extension by Mail

You can simply download and print Form 4868 from IRS.gov, fill it out, and mail it in, along with a check for estimated income taxes owed.

The form itself includes information about where to send the document, depending on where you live.

Recommended: Steps to Prepare for Tax Season

Can I File for a Tax Extension If I Owe Money?

Yes, you can still file for a tax return extension if you owe the government money — but the money itself is still due on the original due date.

Unfortunately, there’s no way to file for an extension of taxes owed. Rather, your best bet is to pay as much of your estimated taxes as you can when you file for the extension, and then apply for a payment plan online or call the IRS to learn about your options for complete repayment.

Can Someone Be Denied a Tax Extension?

Yes, but it’s uncommon. If your tax extension was denied, it was probably because of a mistake in your personal information on Form 4868.

You can resubmit your request and make sure to enter your current address, name, and Social Security number correctly.

How to Know If You Owe Taxes

While self-employed individuals must estimate their taxes and pay on a quarterly basis, those who file using
W-2 wage reports may not do this kind of taxation math.

There are several easy ways to find out if you owe Uncle Sam.

•   You may receive a notice in the mail from the IRS, but ensure that it’s official correspondence and not a note from a scammer. The IRS will never email, text, or reach out to individuals via social media.

•   “Your Online Account” on IRS.gov allows you to see how much you owe in taxes. This user profile also allows you to pay any owed taxes directly.

•   You can always call the IRS at 800-829-1040 to confirm any amount of back taxes you might owe.

The Takeaway

Is it hard to file a tax extension? Not really. What may prove difficult is paying all taxes owed by the filing deadline (aka Tax Day) or paying a balance still owed plus a penalty and interest after the April date to file taxes.

It’s important to have a handle on your tax status and tax bill as April 15th arrives. It’s also wise to have a good banking partner and accounts that allow easy payment of any money you owe or refunds you receive.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

How do I know if I’ve been approved for a tax extension?

Extension requests are rarely denied, but news of a denial would come by email. In the event of an error in an address or name, a taxpayer will be given a few days to remedy the error and file a tax extension again. Usually, you can get an automatic extension of time to file your tax return by filing Form 4868 electronically. You’ll receive an electronic acknowledgment of your request.

Is there a fee to file for a tax extension?

No. Filing for a tax extension is free.

Is the process for filing a tax extension easy?

Yes. You simply submit Form 4868 electronically or by mail before the filing deadline, or make a tax payment through approved methods and indicate you want an extension of time to file your federal return.

What happens if I file my taxes late and without an extension?

If you don’t pay your tax balance by the filing deadline and you did not file for an extension, you’ll get hit with a failure-to-file penalty (in most cases) and interest. Interest also compounds daily on any unpaid tax from the due date of the return until the date of payment in full.

Photo credit: iStock/Delmaine Donson

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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