When Filing for a Tax Extension Makes Sense
The annual meeting is rescheduled to sometime later this quarter and the family reunion is sometime next summer, but like certain holidays and your birthday you know you can always count on a few specific dates. It’s reassuring. One such day is Tax Day, AKA April 15. Yet, unlike a birthday this looming deadline tends to sneak up on you in the least enjoyable way. And even if Tax Day is hardwired into your brain (and all your digital and paper calendars), the fact of the matter is that sometimes it makes more financial sense to file for a tax extension than to file on Tax Day. Here are a few situations and tidbits of information where filing for an extension could make sense for your financial situation:
Gather your papers...and wits. Compiling all the tax documents and information necessary can be incredulously tedious. Whether you run your own business, freelance for a multitude of clients, had documentation arrive late, or had a lot of personal changes in the past tax year, it can pay off to afford yourself an extra few months to file.
Consequence free is the way to be. If there is even a reasonable doubt that buried beneath your stack of write-offs and documents there is the chance of missing the Tax Day deadline, file for the extension. There are no consequences to the individual or business filing and there are no penalties or fees. You may not be able to fill out your taxes in entirety by April 15, but be sure to file IRS Form 4868 (yes, just one!), Application for an Automatic Extension of Time, to get a six month window added to your timeline.
Skip the fees. You’re already paying taxes. You don’t want to have to pay the government MORE money. But, that’s exactly what’s happen when you miss the April 15 deadline without an extension filed, unless you can prove “reasonable cause” for not filing on time. (Reasonable cause relates to happenstances like the death of an immediate family member, tax documents destroyed in a disaster like a fire or flood, or intensive illness.) Plan on paying up to the tune for 5% every month on the “additional taxes owed” up to a cap of 25%. If you finally get that paperwork in but it’s after 60 days of the due date, you’ll face a penalty of all of your unpaid taxes or $135 (whichever is lesser).
Expat status. If you’ve moved across the pond (either one) in the past tax year it may be advantageous for you to nab a little extra time to file, especially if you haven’t qualified for the foreign earned income exclusion yet. This specialty exclusion can greatly reduce the taxes you need to pay. In this case resident aliens and U.S. citizens will want to file Form 2350 for the time needed to meet the physical presence or bona fide residence test.
Consult a financial advisor about obscure tax laws. The American tax system has all sorts of funky rules and regulations that impact how much you actually need to pay in taxes. A certified tax accountant or financial advisor is going to have the expert information you need in order to reduce total taxes due. For example, one of those obfuscated rules is that if you converted a retirement account over to a Roth IRA at any point during the tax year, but want to reverse the conversion, you can do so anytime before the tax return is due. Meaning, if you file for an extension, because of something like fallen investment values, you have six additional months to hit the undo button and save on taxes.
Don’t be fooled. The term extension doesn’t mean you get skip out on paying anything. If you do file for an extension you have a couple options: the first (recommended) option is to pay the estimated taxes you owe by Tax Day. You likely have a good idea of what you owe given your documentation on hand and in relation to what you paid the year prior. The other option, is to file and not pay until your later due date. This option is not recommended unless completely necessary because of the interest and penalty percent on underpayments you’ll accrue for every month you’re late.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2022 Advisor Websites.