Is filing a tax extension the right move for you?
Is filing a tax extension the right move for you? Having extra time to finish your return is often necessary, however, there are both pros and cons involved with filing for an extension.
You might not have a choice under some circumstances. Having extra time to finish your return is often necessary if you’re still waiting for tax documents to arrive in the mail or if you need additional time to organize your deductions. However, there are both pros and cons involved with filing for an extension.
Pros of filing a tax extension:
- Reduce late penalties. You’ll avoid the 5% per month late-filing penalty if you file for an extension, then file your return by the extended deadline, which is Oct. 16, 2023, for 2022 tax returns.
- Preserve your tax refund. The refund statute of limitations is also extended by six months when you file for an extension, which can preserve the ability of taxpayers to receive their federal tax refunds, even if they’re behind with submitting their tax returns.
- Fund a self-employed retirement plan. Self-employed people might want to fund SEP IRAs, solo 401(k)s, or SIMPLE IRA plans for themselves. Filing for an extension provides these taxpayers with an additional six months to do so.
- Take extra time to make elections. A wide variety of decisions must be made when you’re preparing your tax return. Filing an extension gives you extra time to mull it over or to seek help.
- Improve the accuracy of your return. An extension gives you or your accountant extra time to go over your return to make sure everything is complete and accurate before you send it in.
- Reduce your tax preparation fees. Price-sensitive taxpayers can save money on tax prep by shifting tax preparation to a time when their accountant is less busy and charging a lower fee.
Cons of filing a tax extension:
- You won’t gain extra time to fund an IRA. Contributions to a traditional IRA and Roth IRA are still due by the original tax deadline unless you are contributing to a SEP-IRA.
- You can’t switch from married filing jointly to separately after the deadline. Married taxpayers who file jointly before the April deadline still only have until April 15 (unless you are subject to a disaster relief exception) to amend their tax returns to switch to the married-filing-separately status.
- The mark-to-market election for professional traders doesn’t advance. You must make this election by the original April due date (unless you are subject to a disaster relief exception).
- You might confuse the IRS. The agency might ask you to file a tax return because you filed an extension to ask for additional time, then ended up not filing—perhaps because you realized that you don’t meet the income requirements.
Summary
An extension gives you more time to file, but it does not give you more time to pay. Most extension requests will be honored automatically. You don’t have to explain to the IRS why you need the extension; simply file the form. Interested in getting a professional to look at your books for tax filing? Schedule a call with us today.
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