Itís important to file your taxes on time, but sometimes there isnít enough time to get your financial records in order. In this case, the IRS allows for a six-month extension period to file your taxes, given that you complete and submit Form 4868 (for individuals) or Form 7004 (for businesses) before the April 15 deadline of each year. Thereís no penalty for acquiring a tax extension! However, proving to be lackadaisical will do more harm than good. Hereís what you need to know about tax extensions, and why itís important if you havenít already to file your taxes before October hits.
Filing a Tax Extension is a Good Thing
An obvious benefit to requesting a tax extension is you now have an extra six months to prepare your tax documents and get them ready to report them to the IRS. Itís best to request an extension on your filing period than to file late without one. While this remains true, itís pertinent that you understand the benefits of a tax extension.
By requesting a tax extension and filing your taxes prior to October 16, 2017 you will avoid the late filing penalty. The IRS late filing penalty is equal to 5% per month for any outstanding tax payments. Paying on time will help you avoid a deferral on your taxes once the deadline hits.
A tax extension allows you to improve the accuracy of your tax return, and get all the deduction and tax credits youíre eligible for. Youíll be able to go in-depth and make important decisions on your tax return, such as utilizing carrybacks and carryforwards for business losses, or reporting depreciate equipment versus taking a Section 179 deduction. Furthermore, with this extra time you can go in-depth with your accountant and make sure everything is complete and you arenít missing anything before submitting to the IRS.
There are even more benefits for filing a tax extension. With one, you have extra time to fund a retirement plan, whether itís a 401(k), SEP-IRA, or SIMPLE-IRA for self-employed persons only. Youíre even given the chance to recharacterize your IRA from a traditional one to a Roth IRA contribution, or vice versa, depending on your eligibility for one IRA or the other.
What Not to Forget About Your Tax Extension
Filing for a tax extension isnít the same as filing for extra time to pay outstanding taxes. The IRS still expects you to pay your income tax in full by April 15 each year. While a tax extension can limit the amount of penalties that come up, there remains a monthly half percent late payment penalty on any outstanding balance.
In addition, tax extensions donít allot further funding of an IRA. Any contributions must be in by the initial tax deadline annually. An extra item to consider for married couples is the status of your tax returns. If you wish to switch from a joint tax return to separate ones, you must amend your tax returns by April 15. As an added bonus, a tax extension doesnít give you extra time for mark-to-market elections for professional traders. These may be important to you, and if you were thinking of doing one these during your tax extension, youíre out of luck. Fortunately, youíll be ready to prepare these items in time for the upcoming tax season at the beginning of next year.