Every year as the tax filing deadline approaches taxpayers become especially attentive to ensuring their taxes are prepared and ready to be filed on time. For those with complex tax returns it can be a stressful time trying to compile the necessary documentation for their CPA to complete the return. Unexpected delays in receiving essential documentation can create unwelcome delays. As many are aware the IRS offers the opportunity to request an extension for filing your annual tax return. The extension gives taxpayers another six months to file their taxes (October 18 for individuals and September 15 for certain businesses this year), which can provide much needed time to complete the return as thoroughly as possible. While extensions offer relief to taxpayers it’s important to understand how they work to properly set expectations. To help clients, prospects and others understand tax extensions; JLK Rosenberger has provided a brief summary of the pros and cons of each below.
Tax Extension Benefits
There are several appropriate reasons to consider filing a tax extension, including:
- Simple Filing Process. The best news about a tax extension is that you don’t need a reason to file one. Simply filling out the proper form (online or by paper) by tax day is enough to grant you the six-month extension without incurring any penalties. Be sure to check your state tax laws and file the necessary forms with them if needed as well..
- Identify Additional Deductions. Taking the extra time can help ensure you’re capitalizing on all available tax benefits and making good election decisions, like determining whether to depreciate equipment or take a Section 179 deduction or whether to carry back or forward any business losses. Additionally, an extension allows you to take advantage of retroactive tax law changes without the added time and expense of filing an amendment.
- Plan Contribution Extensions. Filing an extension gives those who are self-employed another six months to fund a SEP IRA, solo 401(k) or SIMPLE IRA retirement plan. Also, as long as it is funded by the April deadline, you can re-characterize a traditional IRA contribution into a Roth IRA, or vice versa, by the extended October deadline.
- Correct Missing or Inaccurate Information. Sometimes certain information, like a Schedule K-1 or Form 1099, arrives too late to complete your tax return by the April deadline. You may be sent a notice that your financial institution or investment company has been given an extension and will be correcting 1099s, for instance. In this case, a tax filing extension is the best way to ensure an accurate return.
Tax Extension Drawbacks
Just as there are some good reasons to file an extension, there are some other facts that may dissuade you from doing so, including:
- Tax Payment Due Date. The most common misconception about filing a tax extension is that you are also getting a reprieve on your tax payment. Unfortunately, this is not so. A taxpayer is required to estimate the amount of taxes due and make the required payment. In fact, failing to pay what you owe (at least 90% of it) by the original tax deadline can result in some costly penalties and interest. If you are unable to pay by tax day, consider using a credit card or asking the IRS for a payment alternative. A short extension (60 to 120 days) will still incur penalties and interest, but at a lower rate. An installment agreement may also be available, which will allow you to pay a set amount per month until the tax is paid.
- Refund Delays. If you are expecting a refund this year, you will have to wait longer for it. When filing an extension, the IRS does not process projected refunds until the return is officially filed. So if there is an expected return it’s important to submit the completed filing ASAP as you will need to wait for the refund.
- Extensions & Retirement Contributions. Contrary to popular belief, an extension won’t give you extra time to fund an IRA. Contributions to a traditional IRA and/or Roth IRA are due by the original April deadline. Even if an extension is filed a taxpayer will not be able to make contributions for the prior taxpayer for the extension period.
- Ineligibility. Taxpayers who were approved for an “offer in compromise” must file by the April deadline during their five-year probationary period or risk the offer being revoked and the original amount owed being reinstated.
Tax return extensions are a useful tool appropriate for many situations. However, before filing an extension it’s essential to understand what you can expect. If you have questions about your individual or business tax return, extensions, or other tax planning questions, JLK Rosenberger can help. For more information call us at 949-860-9902 or click here to contact us. We look forward to speaking with you soon.