Tax Extensions - Why You Need One (or More Than One)
April 15 is known as “Tax Day”. This year the tax filing deadline for individuals is April 18, 2022, because of the Emancipation Day holiday in the District of Columbia—even if you don’t live in the District of Columbia. If you live in Maine or Massachusetts, you have until April 19, 2022. That is because of the Patriots' Day holiday in those states. In fact, the real Tax Day wrapping up tax season is October 15 (for more details about tax due dates please read Expat Tax Due Dates and Deadlines). The IRS allows a generous “automated” 6 months extension to every taxpayer - but it is not automatic. The extension must be requested by filing Form 4868 (TFX can file this for you).
Some taxpayers are reluctant to file an extension.
Common reasons for not filing the Extensions
- An extension may raise a red flag before the IRS and increase the risk of audit
- I am a natural procrastinator. If I file an extension I may be late in October too.
- I have all my tax documents ready. It is just a matter of getting the forms filled. Why file an extension if I won’t use it?
In truth, none of those reasons matter. You can file your tax return at any time up until the extension date. Giving up this free gift from the IRS is akin to rafting without a life vest; you don’t expect the raft to turn over but if this happens that little vest will be your life saver. And, importantly, you don’t get extra points for finishing your trip without wearing one.
Should I need to Pay Tax with an Extension?
Often it is misunderstood that filing for an extension will postpone both the filing deadline and the payment deadline. But, in fact, The extensions will extend only the filing deadline of the tax returns and not the payment deadline. And any tax payments that are estimated should be made by April 15th at the time of filing the extensions.
Let us see an example below for US resident individuals of how the extension works for filing Form 1040.
If you are a US Citizen or Resident residing Inside the United States, your tax deadline will be April 15th, 2022. If you cant file your return within the tax deadline, then you can avail automatic 6 months extension up to October 15th, 2022 by filing a Form 4868. Any expected tax dues should be paid on April 15th itself to avoid any late tax payment penalties.
If you are a US Citizen or Resident residing Outside the United States, your tax deadline will be June 15th, 2022. It is a 2-month automatic extension given by the IRS to US taxpayers living abroad from the normal tax deadline. If you cant file your return within June 15th, you can avail extension up to October 15th, 2022, by filing a Form 4868. Any expected tax dues should be paid on April 15th itself to avoid any late tax payment penalties.
S-Corps, Partnerships — some Extensions need to be filed earlier than others
Often, an extension is an obvious necessity. If you expect to receive income from a partnership, you must file an extension because you have very little chance to receive the form reporting your income from the partnership (so called Schedule K-1) ready before May.
On the contrary, if you are a general partner in the partnership responsible for tax filing, you should rush to file an extension for the partnership. Partnership extensions have a shorter timeline and must be filed by March 15th. Failing to file a partnership tax return or partnership extension by March 15, one may expect to pay a $210 penalty for each partner, per each full or partial month of delay. One day is considered a partial month. Same penalties will be applied for delayed tax returns of S-corporation (same timeline of March 15).
And don’t forget about state penalties; many states (i.e. New York or Florida) require a separate extension for business state return - and penalties for late filing levied by state tax authorities are higher than those levied by the IRS.
Free options are the best options — don’t give up flexibility
Benefits of Filing an Extension:
Not everyone is a bigwig - we must need to know what filing a tax extension does. Let’s say you don’t have a corporation or partnership, but simply freelance and report your income on Schedule C. Upon having your tax return prepared you discovered that you owe more tax than you had anticipated. Wisely, your tax preparer suggests making a contribution to the SEP plan, which will reduce your taxable income significantly. You can put aside up to 25% of your net business income and the timeline to make SEP contribution is October 15, not April 15 like for the regular IRA.
Alas! You did not file an extension, and therefore you missed the opportunity to make SEP contribution after April 15. Had you filed an extension (just in case) - your hard-earned dollars (or Euros, etc) would go towards funding your retirement instead of paying higher taxes to Uncle Sam (or Aunt New York).
There are dozens of other examples where a timely filed extension protects you from filing in a rush at the last moment, filing with an incomplete set of documents, filing an amended return, and spending more time and more money - only because you left your life vest behind before setting sail.