Tax Day in the U.S. is April 15, or the next business day if it falls on a holiday or weekend. While having over three months after the New Year to prepare taxes sounds like enough time, it isn’t for many people, including me. So, instead of stressing out every year, I take advantage of the extension allowed by the Internal Revenue Service.
Dog ate your receipts? Went out of town? Haven’t received all the necessary paperwork? The reason doesn’t matter. In general, the IRS automatically gives you a six-month extension, if you submit Form 4868 by the April deadline. However, if you owe state income tax, some states accept the federal form, but others require you to file a separate state extension. Visit your state’s tax website to check the requirements and get the necessary forms.
Here are the five most common reasons to consider filing a tax extension:
You Run Out of Time
For many people, the first quarter of the year is their busiest time at work. If you’re overloaded or travel frequently, you might just run out of time.
Even using a tax preparer might not help if you deliver your information at the last minute. My accountant requires all personal information at least a month in advance.
You’re Missing Information
Because I have a fairly complicated tax situation, I wait on multiple documents every year, including Form 1099s and Schedule K-1s. Many arrive too late to complete my return by the April deadline.
If you don’t have all the necessary paperwork, or if any information you have is incorrect, it’s better to file an extension than to submit an incorrect return and amend it later. However, if you do catch an error, it’s worth noting that you have up to three years (including extensions) after the date you filed your original return to correct it using Form 1040X.
Your Accountant Is Busy
Tax professionals are under the gun every year to make the deadline for corporate and partnership tax returns, which is March 15. The firm I’ve used for decades prioritizes my business returns, but typically doesn’t have enough time to get my personal taxes submitted within the following four weeks.
You’re Dealing With a Major Life Event
Every year brings different challenges. If you’re dealing with a major event, such as relocating, getting married or divorced, an illness or the loss of a loved one, you may not have the mental bandwidth to meet the regular tax deadline.
You Might Save Money
Sometimes filing an extension is part of a bigger plan to save money or cut your taxes. For example, if you use a tax professional and are missing key information, filing an extension is less expensive than filing an incomplete return and then filing an amended return.
Also, giving your accountant (or yourself) more time makes it more likely that he or she can find available tax benefits and reduce what you owe. Being rushed isn’t an excuse for making errors, but could certainly result in missed savings.
The Downside to Filing an Income Tax Extension
With all the reasons for a tax extension and the benefits of filing, why would anyone file on time? Well, the downside is that an extension gives you extra time to submit your tax form(s), but not extra time to actually pay them.
If you owe taxes, your payment is still due on Tax Day. So, when you file for an extension, always submit payment by the April deadline. I rely on my accountant to estimate how much I owe based on information they do have.
If you overpay, the excess gets returned eventually as a tax refund. But if you underpay, you’re subject to a penalty of 0.5 percent interest on the unpaid amount every month, or part of the month, up to a maximum of 25 percent, until you pay the full amount.
Not being able to pay your taxes isn’t a valid reason to file an extension. However, if you have trouble, you may qualify for a payment plan or other relief.
If you or your accountant complete your tax return by the April deadline and feel confident that it’s correct, go ahead and file it by the original due date. But it’s good to know that if you don’t pull everything together in time, an extension can help relieve your annual tax stress.
Click here to read more about tax tips and deadlines for last-minute filing.