Filing an extension for your tax return is simple, and almost everyone is eligible. But is it worth it?
We cover the pros and cons of a tax extension below.
What is a Tax Extension?
A tax extension is a formal request to the IRS to extend your time to file your taxes. If approved, you get an additional six months to file your taxes. For example, in 2023, the extended tax deadline is October 16, 2023 for individuals.
The IRS Form 4868 is easy to complete, and most individuals are automatically eligible. However, here’s what you should consider.
Pros of a Tax Extension
Here are the benefits of a tax extension.
Avoid the Late Filing Penalty
The IRS charges two penalties if you file your taxes late. One is a 5% per month penalty of taxes owed for failure to file. The other is 0.5% of taxes owed for failure to pay.
By filing an extension, you avoid the late filing penalty, but if you don’t pay what you owe, you’ll still pay the late payment penalty. Making an extension payment online, automatically files IRS Form 4868 for you.
File a More Accurate Return
If you have a complex tax situation or don’t have all the necessary documentation to file your taxes, you might file an inaccurate tax return if you rush. Filing for an extension gives you more time to find what you need and to accurately file your taxes.
Get Professional Help
If you have questions about the deductions or credits you qualify for or are unsure about your tax filing, a tax extension gives you more time to handle the situation and get the right answers.
Get Extra Time to Fund your Retirement Plan
If you’re self-employed and have an established retirement account (Individual 401K, SIMPLE, or SEP plan), you can contribute until your extended tax deadline. If you don’t have a retirement account, you have until the extended tax deadline to open and fund a SEP IRA.
Cons
There are also some downsides of the tax extension to consider.
Wait Longer for your Refund
If you’re due a tax refund, you’ll wait until you file your taxes and then a few more months to receive it. Unfortunately, this means the IRS holds onto your funds longer than necessary.
You’ll Still Pay the Late Payment Penalty
You'll pay the late payment penalty if you pay at least 98% of the taxes you owe before the official tax deadline. So even if you don’t know exactly how much you owe, it’s best to estimate.
No Extra Time to Contribute to your IRA
Unless you’re self-employed, the deadline to contribute to your IRA remains the regular tax deadline.
Final Thoughts
There are often good reasons to file a tax extension, but be sure not to abuse it. If you know you’ll owe money, try to pay as much as possible and file your taxes as soon as possible.
If you have questions about filing your taxes, whether a tax extension is best for you, or other tax questions, contact Henson & Murtha today!