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Extending your Taxes

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April 15 is a date that a lot of people don't associate with positive thoughts and happiness. Nevertheless it is something we all must deal with. Death and taxes, right? On a good note, the deadline is actually April 18 this year since the 15th falls on a Saturday. But what happens if you just don't have everything organized and prepared to file your taxes on time? Well, there is some good news and some bad news.

First, the good news. The good news is that you can do an extension. It is a simple form, Form 4868 which is called the Application for Automatic Extension of Time to File. It can be filed electronically or via paper. This extension will get you an additional 6 months to file your return! October 15 is usually the deadline date for extensions but that date can slightly differ if it falls on a weekend. You can file any time within that 6 month extension. Sounds pretty simple, right? You might be asking yourself, why don't I extend every year that sounds awesome!

Well, that is where the bad news comes in. Even though you can fairly easily get an extension of time to file your taxes, you don't get an extension of time to pay! So, when you request your extension you have to go ahead and pay as well. The extension form has a line for your Estimate of Total Tax Liability, a line for Payments made, such as withholding or estimated payments made, and then a line for the Balance Due. The Balance Due is the amount you will go ahead and pay with your extension.

Oftentimes, people need to extend because they don't have everything together to calculate how much tax they owe. This is where knowing your estimate at the time of extension can be difficult. Some people like to estimate high and others estimate low knowing that they are still most likely going to owe more. This is where some more bad news comes into play. If your estimate is low and the amount you pay with your extension is not enough to cover your total tax liability when you do file, then you will have penalties and interest on top of the tax owed.

Interest is calculated beginning on the original deadline date (usually April 15). The interest amount is figured on the amount of tax that was owed by the deadline but not paid. For example, if you had paid $10,000 by April 15 and actually owed $15,000 then your interest would be calculated on the $5,000 shortage from April 15 until the date you filed.

You may also be subjected to a Late Payment Penalty. This applies if you did not pay at least 90% of the actual tax due and didn't pay the balance with the extension. In the prior example, the $10,000 paid was not at least 90% of the $15,000 owed so a Late Payment Penalty would apply in that situation. However, if you had paid $9,500 by April 15 and actually owed $10,000 and paid the $500 balance when you filed, then you would not be subjected to the Late Payment Penalty because you had paid 95% of the actual owed.

What happens if you still don't file by the extension date of October 15? This is where the Late Filing Penalty comes into play. This penalty is 5% of the tax amount due for every month the return is late and carries a max penalty amount of 25% of the tax amount due. So, you want to make sure to file by your extension date!

Filing an extension can be a norm for people with complex returns or people waiting on information from business returns before they can file. Getting the estimate right can be tricky when you are waiting on substantial financial information on April 15. That is where deciding to estimate high and risk over-paying or estimate as accurately as you can (and hope that amount is accurate in the end or at least 90% of what is owed) becomes a personal decision.

All in all, extending your taxes is quite simple, especially if you need the extra time to get your paperwork together. Just don't forget to pay that estimate with your extension! Taxes are bad enough, nobody wants penalties and interest too!

NOTE: This information is for federal tax purposes. States will vary.

Information contained in this post is for educational purposes only and is not considered financial advice.


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