Filing Tax Extensions
It’s probably safe to say that almost no one enjoys doing their income taxes. Many of us dread preparing our returns, but some dread it enough that they file an extension every year simply to put it off.
While this desire is understandable, it’s not a wise course of action. There are only two good reasons to file an extension:
- an emergency has occurred which prevents you from being finished on time, or
- you are waiting for documents that are not ready yet.
Filing your taxes late has some negative effects, and it can cost you in more ways than one. An obvious downside is that it delays any refund you may be due, but there are other consequences you may not have realized yet.
Here are three reasons not to file an unnecessary extension:
1- You can wind up owing considerably more. Filing an extension delays the deadline for filing your return, but not for paying the taxes you owe; you still must submit payment by April 15. If you don’t pay enough, the IRS will charge a penalty of one half of one percent (0.5%) of your unpaid taxes for each month or part of a month your return is late, and this can build to as much as 25% of your unpaid taxes. That means these penalties start accruing on April 16 and continue until you pay. The only way to make sure you avoid penalties is to pay more than you owe, but you can’t be sure how much that is until you have completed your returns.
2- You lose time to make good financial and tax decisions for the current year. Funding a retirement account, calculating estimates for next year, and changing your withholdings are just a few of the things you can’t do without guesswork until your prior year return is finished. If you file at the last minute in October, it will be too late to properly make any needed adjustments.
3- You could be in trouble if an emergency actually happens later. You only get one grace period. If you file an extension to procrastinate and then a true emergency occurs closer to October 15, you can’t file another extension. You will be forced to either deal with it in the midst of your emergency or pay the penalties and interest for filing late.
If all your tax documents are ready, the effort it takes to file is the same on April 15 as it is on October 15, and there are no downsides. If you find it necessary to file an extension, you don't have to wait until October to start working on your taxes. Go ahead and complete your returns as soon as possible; it’s much better for your overall financial health.