For people who break into a cold sweat every year during the tax deadline countdown, one word brings a little relief – Extension. Many people believe that a tax extension is somewhat of a cure-all.
Don’t have the money to pay taxes? File an extension. Still trying to get everything in order? File an extension.
However, the tax extension isn’t exactly what it sounds like, and it doesn’t really “cure” anything. Here are 5 important facts about filing a tax extension that you need to know before you file.
1. An Extension Isn’t Really an Extension
The word “extension” is somewhat misleading. When you file a tax extension, you’ll get six extra months to turn in your tax paperwork to the IRS. Sounds reasonable, but keep reading.
The keyword here is “paperwork”. A tax extension doesn’t extend the deadline to pay any taxes that you may owe to the IRS.
Sound backwards? Not what you expected? Welcome to enlightenment my friend.
If you file an extension, you will still have to pay any due taxes by the normal tax deadline. So before you file an extension assuming you’ve got 6 extra months to pay your taxes, think again.
2. The Penalty is in the Eye of the Filer
In sports, penalties are up to the discretion of the referee. When it comes to tax time, the IRS wears the zebra stripes.
Although technically you’re not penalized or charged a fee for submitting the tax extension paperwork – Form 4868 – there could still be a downside to filing an extension.
If you file an extension but you’ve got a good grasp on your situation and you are pretty sure a tax refund is in your future this year, then you really have nothing to worry about. The government will hold onto your refund until you get your paperwork sorted out during your extension period.
Once you file, you’ll get your refund.
But the rules change a bit if you end up owing taxes to the IRS. If you file an extension but you choose not to pay estimated taxes by the tax deadline, the IRS will charge you interest on the taxes that you owe them.
Feels like a penalty to me.
3. You Can Request An Extension Using TurboTax
Many people still believe that the only way to file for an extension is the old-school paperwork method. Not so anymore.
The IRS will gladly accept your tax extension form via tax software and the world wide web. Simply use your tax software to e-file your Form 4868. The IRS will acknowledge your request as long as you file by the tax deadline.
4. Your Reasons Usually Don’t Outweigh the Benefits
Unless there are certain pieces of paperwork you’re waiting to arrive in the mail, an extension probably won’t deliver the benefits you might expect.
If you’ve procrastinated during tax season, the solution isn’t an extension. You could end up costing yourself more money and more frustration by asking for more time.
The best piece of advice is to buckle down, stare your tax paperwork in the face, and get it done on time.
5. No Extension for IRA Contributions
Lastly, if you think you’ve found an IRA-contribution loophole in the tax process, think again. Requesting a tax extension doesn’t have any impact on the deadline for contributing to your Traditional or Roth IRAs.