With less than a month left to file your tax return, you may be debating whether filing a tax extension makes senses.
Everyone’s situation varies, of course, but it’s not necessarily a bad idea especially if you don’t have all your ducks in a row by April 15. It’s also very easy to do. Simply fill out form 4868 by April 15 either electronically or via snail mail and you’ll automatically be granted an extension for six months. You don’t need to give a reason why you’re requesting an extension.
Filing a tax extension is actually a lot more common than people might think. Nearly 13 million taxpayers requested an automatic extension last year for their 2013 tax returns.
But there are some major misunderstandings and questions about filing an extension. Here’s what you need to know:
You Still Have to Pay Taxes by April 15
Filing a tax extension with the IRS allows you to push the deadline back to Oct. 15 and avoid IRS late-filing penalties as long as you file for the extension by April 15. But here’s the catch: You must pay your estimated tax bill by April 15.
“The extension only pushes back the due date for the paperwork,” TurboTax explains. “If you owe money, you need to estimate the amount, then file your extension and make your payment by April 15.”
What Happens If You Don’t Pay by April 15?
The same as if you file a return by April 15 but fail to pay the taxes you owe: You could be liable for penalties and interest. If you have underestimated the amount you owe, you will also be liable for paying interest on the amount you failed to pay.
The IRS says you should pay at least 90 percent of your tax liability. If you pay less, you’ll end up owing a 0.5 percent penalty of the underpayment every month until you pay the balance.
What Are Some of the Best Reasons for an Extension?
If you have to pay taxes by April 15 anyway, you may wonder what the benefit is of applying for an extension. There are several cases in which it makes sense. The main advantage is it gives you more time to get your paperwork in order. This is especially useful for people who are receiving some key forms late.
“As one example, quite often taxpayers who have invested in partnerships or S corporations do not receive their K-1s from these entities until after the original April 15 due date,” Ron Michelson, a CPA with Florida–based Fiske, told the IRS’s U.S. Tax Center.
Filing a tax extension also makes sense if you’ve been lazy or too busy to get all your paperwork in order. But if the IRS owes you a refund, skip the extension and file as soon as possible. You won’t face a late-filing penalty if you are owed money back and you don’t want to extend your interest-free loan to the government any longer than necessary.
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