Tax Extensions: Explained
As tax season approaches, many individuals find themselves scrambling to gather all the necessary documents and information to file their taxes. However, for those who may need more time to prepare, filing a tax extension can be a helpful solution. Let’s explore the myth surrounding tax extensions and break down the pros and cons of filing one.
TAX EXTENSIONS & THE IRS
There’s a common misconception that filing a tax extension means you are more likely to be audited by the IRS—which is most people’s worst nightmare.
However, filing a tax extension does not increase your chances of being audited by the IRS. It is a common practice that many taxpayers use every year, and as long as you pay any estimated taxes owed by the original deadline, you can file an extension with confidence.
Filing an extension does, however, give the IRS more time to scrutinize your return, so it is important to ensure that all information is accurate and complete.
PROS OF FILING A TAX EXTENSION
Let’s cover the benefits of extending your tax return filing timeframe.
More time to file: One of the most significant advantages of filing a tax extension is having more time to prepare and file your return. This can be particularly useful if you have a complex tax situation or need extra time to gather all the necessary information.
Avoiding penalties: If you make a good-faith effort to estimate your tax liability, you can avoid the late-filing penalty (5%) of the unpaid taxes for each month or part of a month that your return is late. Filing an extension can help you avoid this penalty and potentially save you money.
More time to contribute to retirement accounts: If you haven't maxed out your retirement account contributions for the previous tax year, an extension can provide extra time to make contributions and claim the deduction. This can be particularly beneficial for those who are self-employed or have irregular income streams.
Ensure you have fully captured expenses for self-employment or rental properties: Filing an extension can give you more time to ensure that you have captured all of your expenses for self-employment or rental properties. This can be particularly important for those who have multiple streams of income or complex tax situations.
CONS OF FILING A TAX EXTENSION
As with anything in the financial world, there are some downsides to tax extensions that should definitely be considered:
Interest and penalties: Although you can avoid the late-filing penalty by filing an extension, you will still be subject to interest and penalties if you don't pay the estimated taxes owed by the original filing deadline. It is important to estimate your tax liability as accurately as possible and make any necessary payments to avoid additional fees.
Delayed refunds: If you are due a refund, filing an extension will delay the process of receiving it. The IRS will not begin processing your return until they receive it, which can be frustrating for those who are expecting a refund.
Increased risk of an audit: Filing an extension does not increase your chances of being audited, but it does give the IRS more time to scrutinize your return. If you file your return later, the IRS will have already flagged any discrepancies they find on other tax returns, which may increase the likelihood of an audit. It is important to ensure that all information is accurate and complete to avoid any potential issues.
Final Thoughts
Filing a tax extension can be a helpful solution for those who need more time to prepare and file their taxes. It can provide more time to contribute to retirement accounts, ensure that all expenses are captured, and avoid penalties for late filing.
However, it is important to estimate your tax liability as accurately as possible and make any necessary payments to avoid additional fees. If you are expecting a refund, filing an extension will delay the process of receiving it, and it is important to ensure that all information is accurate and complete to avoid any potential issues.
If you are unsure whether filing an extension is right for you, it is always a good idea to consult with a tax professional or financial advisor. If you haven’t found the right fit for your financial situation yet, let’s connect!
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