April 17 always seems to arrive before people feel they are ready for it, but there's a simple way to extend this daunting deadline for tax returns . If you're unable to complete your returns by that deadline, you can file Form 4868, an application for automatic extension, with the Internal Revenue Service (IRS).
When you file for an extension, you're simply asking for more time to complete your tax forms. The IRS is not granting you more time to pay any taxes that are due. If you owe taxes as of April 17, expect to pay interest - and possibly a penalty - on the amount due if you choose to take the extension. Read on to learn how to give yourself the gift of time, without paying an arm and a leg for the privilege.
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Whether you're subject to a penalty depends on the amount of taxes owed after April 17.
Let's look at the basics:
- Failure to File Penalty : If you don't file an extension request by April 17, the "failure to file" penalty runs at a rate of 5% of the balance due per month, up to a maximum of 25% of the taxes owed.
- Failure to Pay Penalty : If you do not pay your taxes expect to get hit with a "failure to pay" penalty that runs at 0.5% per month with a maximum of 25% of your unpaid tax.- that's in addition to any interest you'll owe on the balance due.
- Interest : If you have a balance due to the IRS after April 15, expect to be charged interest. The interest rate is generally around 8%, which is a lot less than the rate charged by most credit card companies.
Can't Pay All Your Taxes By April 17?
What if you need more time to pay your taxes? If the amount you owe is low enough that you won't be subject to the failure to pay penalty, then file an extension by April 17 and pay the remaining balance due when you submit your tax forms prior to Oct. 15.
If you owe so much in taxes that you won't be able to pay them off by Oct. 15, one option is to file the paperwork to enter into an installment arrangement with the IRS. This is done by completing Form 9465, and attaching that form to the front of your federal income tax return. On this installment request form, you tell the IRS how much you can afford to pay each month and the day of the month that the payment will be made.
The IRS generally charges a fee of between $52 and $105 to any taxpayer who enters into an installment arrangement. In addition, the IRS will charge interest at the prevailing federal rate (approximately 5% per year). Plus, failure to make a scheduled payment will cause the remaining outstanding balance to become immediately due. In addition, you generally aren't allowed to enter into an installment agreement if you have an open installment agreement for a previous year that hasn't been paid off yet.
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Additional Incentive for Self-Employed Individuals
Self-employed individuals might benefit from filing for an extension as well. That's because they have until the due date of their tax return, including extensions, to fund their retirement accounts for the year. If an individual doesn't have a retirement plan set up yet, an SEP IRA can be established as late as the extended due date of his or her tax return, or Oct. 15.
By filing Form 4868 with the IRS, you get an additional six months to fund your retirement plan and deduct the contribution made on your prior year's return. One strategy common to self-employed individuals is to pay the full amount of taxes due with an extension, and then to fund their retirement plans prior to Oct. 15.
Keep in mind that an extension does not give you any extra time to fund your Roth IRAs, Traditional IRAs and Coverdell Education Savings Accounts (ESAs). The due date for these tax-advantaged retirement plans and college savings accounts is April 15.
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Always Submit Your Paperwork On Time
The moral of this story is simple. Because the 'failure to pay' penalty is so much smaller than the 'failure to file' penalty, always try to file all of your tax returns and extension requests on a timely basis, even if you're unable to pay the full amount of the taxes due at that time. Simply filing on time will save you a lot of money and frustration, so take a moment to check your filing now and see whether an extension would benefit you.
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