It seems to happen every year: tax season arrives out of nowhere and threatens to overwhelm you.
Soon, before you know it, the deadline to submit is right around the corner and you don’t feel ready. There’s still mountains of work to get through. Things to organize, and maybe most importantly, money to save.
What can you do?
Many Americans feel hesitant to file for a tax extension. Maybe they feel guilty, or maybe they feel like they don’t know enough about what the process entails. Still, many people do file for extensions– approximately 5.5 million a year.
So should you file a tax extension or not? Read on and we’ll walk you through all the pros and cons.
How Does A Tax Extension Work?
Many people aren’t even sure if they’re allowed to file for a tax extension. Some believe there are special qualifications needed to apply. But this is not true!
Anyone can apply for a tax extension. Yourself included.
The process is simple. You’ll need to get your hands on Tax Form 4868, which can be found easily online. Once you fill out the form, you’ll send it either through e-mail or snail mail to the IRS. Programs like TurboTax usually have a method that allows you to send via their systems as well.
Along with the form, you’ll still need to include part or all of your income tax. More on that in a bit.
There’s no charge or fee for submitting a tax extension form. You simply need to have it in before the tax due date (typically April 15). The extension will grant you a six-month extension, allowing you to turn in your taxes six months later on October 15th.
The Pros of A Tax Extension
There are a number of benefits to submitting a tax extension. Some of them you may not have even considered. They are:
Extra Time To Finish
This is why you’re considering filing for an extension anyway, right? You’re not ready. You need more time. An extension provides you just that. If you haven’t yet figured out your deductions or accounted for your write-offs, this can give you time to do just that.
There are a number of other helpful tasks you can take on during this period, including recharacterizing your IRA or funding a self-employed retirement plan.
A six-month extension is a very healthy amount of time. It should be more than enough to get done anything you failed to do by the initial deadline.
It Preserves Your Refund
There are many Americans who get behind when filing their tax returns. But falling too far behind puts you at risk of losing that precious tax refund.
There’s a three-year window for receiving a check from the IRS. That three year period originates on the initial filing date of April 15. But when you submit a tax extension, it also extends the deadline on your refund.
An extension can be highly important, then, if you think it may take a few years before you’ll be able to receive those funds.
Less Of A Big Rush
It can get pretty hairy in those weeks leading up to the initial tax deadline. Filing for an extension– and moving the bulk of your work to the summer– could actually save you time and money.
Most tax consultants and professionals charge higher rates in the weeks leading up to the April tax deadline. But pushing off might allow you to get the help you need at a more acceptable rate.
Not only that, but you’ll be getting more focused service: instead of being one of a crowd of clients, you’ll likely be one of a few that a tax professional is focusing on in the summer season. This helps to alleviate the risk of mistake or missed opportunities.
The Cons Of A Tax Extension
Filing for a tax extension is probably sounding pretty good right about now. But before you make a leap for the 4868 form, there are a few downsides you should know about.
There’s No Extension On Money Owed
In a perfect world, extending the filing deadline would also get you more time to pay up to Uncle Sam. But this isn’t the case. Any and all tax you owe is still due on April 15 whether you file for an extension or not.
Having an extension can help avoid the costly penalties that would add up from missing the deadline. Still, any outstanding balances left after the 15th will be hit with a late payment penalty of .05% interest per month.
If you need the extra time to file, an extension is a no-brainer. But if you don’t have the money available for the deadline, the extra six months to file isn’t going to do you much good.
Some Restrictions On Extensions
There are a few things you can’t do in the six months granted by an extension. For example, while you can recharacterize an IRA account, you won’t get an extension on funding it. All contributions are still due by the original deadline.
Similarly, there are a number of small parts of your tax return that you won’t be able to change after the deadline. Married couples won’t be able to switch from joint to separate returns, for example.
All in all, these downsides are not too terrible considering the six-month gift that’s coming your way. It all just depends on your situation and why you’re considering asking for an extension in the first place.
Making Up Your Mind
Now that you have all the information, the decision is up to you. There are reasons both for and against filing for a tax extension, and your decision will depend on your own personal situation and priorities.
If you need help making a decision, or with any aspect of your taxes, feel free to contact me at any time.
