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Tax Extension: Good, Bad, or Both?

Posted by : Premraj | Posted on : Tuesday, April 7, 2015

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For many people, filing taxes is a simple matter of filling out the forms and mailing them in with the payment, or request for refund. Even with real estate and other things that can make taxes a little hairy, they don’t have much trouble meeting the April 15 deadline.

However, for some, that April 15 deadline can be difficult to meet, for a variety of reasons. The good news is that if you can’t meet the April 15 tax deadline, you can get an extension.

What is an Income Tax Extension?

An income tax extension gives you six additional months to file your tax return. This means that instead of having to file on April 15, you will have until October 15 to take care of whatever you need to take care of and file your return. There are several advantages to filing an extension, but there are also some disadvantages.

Below is a list of these advantages and disadvantages to help you determine if it’s the right option for you.

The Advantages of Filing an Extension:

The biggest advantage to filing an extension is that it can significantly reduce the penalties you would have to pay for filing and paying your taxes late. Usually, the IRS charges a late filing penalty of five percent each month that you are late in filing, and an additional one-half percent per month that you are late in paying. When you get an extension, you would still have to pay that one-half percent if you owe taxes and don’t pay by the April 15 deadline, but you do not have to pay that five percent late filing penalty.

Another advantage is that it gives you more time to fund and perform other administrative tasks on your retirement plans. If you are self-employed, it gives you an extra six months to fund your IRA or 401(k) plan. It also gives you time to recharacterize your IRA for better tax benefits. For more information on funding and recharacterizing retirement plans during an income tax extension, speak to a CPA or tax professional near you.

A final advantage is that it could be significantly cheaper to file your taxes after the deadline. Tax season is the busiest season of the year for accountants and other tax, and their services often come at a premium at this time.

For Example:

Let’s say we have a couple in Orlando, FL, Wanda and Ken. In 2013 they bought a new house and were expecting their first child in February 2014. However, Wanda developed medical problems and had to do an early delivery in January. Additionally, their baby daughter also had medical issues so both mother and child had to spend several weeks in the hospital, followed by additional weeks at home. Fast forward to the end of March: because of all the health issues and hospital stays, neither Wanda nor Ken has had the time to worry about filing income tax and the deadline fast approaching.

At this point, they have three options:

·  They can scramble to do their taxes on their own, and possibly make mistakes;

·  They can pay a premium to have someone else do their taxes by the deadline; or,

·  They can get an extension, and give themselves more time to do their own taxes, or to find a reliable Orlando CPA to do it for them, at a price they can afford.

With the extension, they might have to pay a small penalty if they owe taxes and pay late, but it could be significantly less than what they would pay if they make a mistake by rushing to file, or what they would have to pay a professional do a rush job at the height of tax season.

The Disadvantages of Filing an Extension:

The biggest disadvantage to filing an extension is that you only get an extension on the deadline to file, not the deadline to pay. If you owe money, you still have to pay on time or face a one-half percent monthly penalty, plus three percent annual interest on the money that you owe.

Additionally, some people might not be eligible for an extension. For example, if you have something called an Offer in Compromise, the IRS can revoke it if you fail to meet the April 15 deadline. If you have any special tax circumstances, you should talk to a financial professional to determine your eligibility.

How to File an Extension

Filing an extension is fairly simple; you can fill out and mail a Form 4868 to the IRS, you can go online, or you can do it through tax software like Intuit or H&R Block. However, as stated before, if you have any special tax circumstances, such as a prior agreement with the IRS, you should talk to a CPA or tax professional before filing an extension to make certain that you qualify.

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