Why File an Extension on Your Taxes

Why File an Extension on Your TaxesThe daffodils are up, the sky is blue, and the scarf you’re wearing is to match your shirt rather than protect your vulnerable neck from frostbite.  It smells like fresh soil, you can hear birdsong… but it’s not the early spring pollen that’s giving you hives: it’s your taxes.

Feeling Overwhelmed? File A Tax Extension

Before you embark on a stress-spiral, did you know that you can file a tax extension to get up to six extra months to complete your paperwork?  You don’t even need a special reason.  The IRS doesn’t ask.  All you have to do is fill out Form 4868 for individuals or Form 7004 for businesses to ask for this extension, all of which can be done for free online.  Moreover, these requests have a near-100% success rate.

There are many reasons why you might want or need an extension this year.  For instance, you might still be waiting for the right documentation to arrive.  If your request for a W2 has gotten buried in your boss’s inbox, it’s better to file the extension than wait and hope!

Another possibility is that your financial situation might have changed, making you feel uncertain about pulling together the right paperwork.  You might have recently become unemployed, or gotten a big raise, or bought or sold a house.  All of these can make tax-time more complicated.  Major life events — a move, a new baby, a change in jobs, illness, injury, or a death in the family, even a natural disaster –may mean that it’s not prudent to deal with your taxes at this time.  Instead, file an extension and allow yourself to prioritize what is most important to you.

If you are running a new business, you may not have noticed until it was practically too late that tax season for businesses is actually in March rather than April… not to mention that you might need a little extra time to figure out how to file all the right paperwork.

There are a lot of advantages to filing later on.  Filing a tax extension can help you avoid penalties, which can amount to 25% of the taxes due.  It costs nothing to file an extension, you get no penalty, and you are even less likely to be audited if you apply for one.

A lesser-known trick for saving money on your taxes rests in the difference between a traditional and a Roth IRA.   If you choose to ‘re-characterize’ your Roth IRA into a traditional IRA before you file, you avoid paying taxes on the balance.  The turnover may take a little while, so it makes sense to ask for an extension. 

Perhaps you are aware of a changing tax law that you know would benefit you; in that case, it makes more sense file for an extension and wait.

Finally, a word to the wise: don’t hesitate to file because of an inability to pay.  An extension does not give you more time to pay, but more time to file.  You have to do the best that you can to estimate how much you will have to pay in taxes (if anything; perhaps you are expecting a refund) and submit that money with your extension request.  If you are having trouble paying your taxes, there is still help: you can get a two or three month’s grace by contacting the IRS and working with them on an installment plan.