Most people think the reason to file a tax extension is because you are really pressed for time or have a colossal problem that forces you to postpone doing your taxes. Filing a tax extension may be looked upon as a character weakness because you can't get your taxes in on time.
Actually, filing a tax extension has its pros and cons, even for retirees, who may have more discretionary time than those working folks. Although, if you're a procrastinator, filing an extension won't make doing your taxes any easier.
Personally, I've filed a tax extension several times, and so far I have not seen my character tarnished or found that the extension sparked a tax audit.
Tax extension explanation. Filing a tax extension is not an extension to pay your income taxes. It is an extension of time to complete the tax paperwork such as the Form 1040, schedule A, B, C, D, E and all those other pesky forms we may need to prepare.
If you file an extension, you have until Oct. 15, 2014, in which to complete the tax return.
And if you're applying for a federal tax extension, make sure you investigate your state and local filing requirements as well.
Advantages of filing a tax extension. 1. After April 15, when the accountant is less stressed, it's quite likely that she'll be more thorough and accurate when preparing your return.
My tax accountant likes me to file an extension. He is so busy from January to April that he prefers to spread out his work a bit by completing an extension for some of his clients. In my decades of paying taxes, I've found quite a few errors when reviewing the returns prepared by various accountants, and the errors seem to decline during those years when an extension is filed.
2. If you work in a job where the work is seasonal, such as a teacher with summers off, then you may have more time in the summer to attend to tax preparation. If your schedule is swamped now, and you paid your taxes and any estimates due, it may be a good idea to postpone preparing the tax documents until you have more time.
3. It doesn't take much time to file an extension and there are several methods to pay the amount of tax owed. Download Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. This form includes all instructions to complete the form as well as methods of payment.
4. It's unlikely that filing a tax extension will trigger an audit. There is a common belief that if you file an extension, you'll trigger an audit.
No one knows for sure what triggers an audit. Yet according to filelater.com, many financial professionals and accountants suspect the Internal Revenue Service has an "audit quota" which begins to fill around mid-April. Thus, if you file an extension, a large percent of the "audit quota" may be filled, making your chance of an audit less likely later than had you filed on time. Regardless of the quota, there's little evidence that filing an extension will increase the chance of being audited.
Disadvantages of filing a tax extension. 1. You may not know exactly how much you owe without completing your tax return. And if you don't pay the amount owed by April 15, you'll be subject to late payment fees and penalties.
2. You'll wait longer for your tax refund. You can't claim your refund until you file your taxes. If you don't file your taxes until September or October, you won't get your refund until the fall.
3. If you miscalculate the amount of tax owed, you will still need to pay the penalties and fees. The late payment fee is 5 percent of the unpaid taxes for each month or partial month that the tax remains unpaid. And the penalty begins to accrue the day after the tax filing due date or April 16. Fortunately, the penalty is capped at 25 percent of your unpaid taxes.
4. If you're filing the extension because you're a procrastinator, it won't be any easier to file in July, August, September or October than it is in April. For those that fall into this category, you will be better off getting the taxes done and off your "to do" list by April 15.
So, at this last minute, if your taxes aren't complete, don't worry. Filing a tax extension might be the right solution for you.
Barbara Friedberg, MBA, MS, is a portfolio manager, consultant, website CEO and author of "How to Get Rich; Wealth Building Guide for the Financially Illiterate." Learn more about money and pick up her newest free investing book at Barbara Friedberg Personal Finance.com.
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