When Filing for a Tax Extension Makes Sense
We used to think of Tax Day permanently fixed on April 15th, but the COVID-19 pandemic and its accompanying stimulus packages have reshaped even this national tax deadline. In light of the ongoing pandemic, the IRS has granted an automatic filing extension for individuals in order to give some flexibility to the American taxpayers in a time of unprecedented crisis. Now individual filers have until May 17, 2021 to file their 2020 federal income tax return.[i]
For those of us who need more time beyond May 17th, it might make financial sense to file a tax extension. Here are a few situations and tidbits of information where filing for an extension could make sense for your financial situation:
Gather your papers...and wits.
Compiling all the tax documents and information necessary can be exceedingly tedious. Whether you run your own business, freelance for a multitude of clients, had documentation arrive late, or had a lot of personal changes in the past tax year, it can pay off to afford yourself a few extra months to file.
Consequence free is the way to be.
If there is even a reasonable doubt that buried beneath your stack of write-offs and documents there is the chance of missing the Tax Day deadline, file for the extension. There are no consequences to the individual or business filing and there are no penalties or fees. You may not be able to fill out your taxes in their entirety by May 17th but be sure to file IRS Form 4868 (yes, just one!), Application for an Automatic Extension of Time, to get a six-month window added to your timeline.
Skip the fees.
You’re already paying taxes. You don’t want to have to pay the government MORE money. But that’s exactly what’ll happen when you miss the May 17th deadline without filing an extension unless you can prove “reasonable cause” for not filing on time. Plan on paying up to 5% for every month after the deadline on the “additional taxes owed” up to a cap of 25%. If you finally get that paperwork in, but it’s after 60 days past the due date, you’ll face a penalty of all your unpaid taxes or $135 (whichever is lesser).
If you’ve moved out of the country in the past tax year it may be advantageous for you to nab a little extra time to file, especially if you haven’t qualified for the foreign earned income exclusion yet. This specialty exclusion can greatly reduce the taxes you need to pay. In this case resident aliens and U.S. citizens will want to file Form 2350 for the time needed to meet the physical presence or bona fide residence test.
Don’t be fooled.
The term extension doesn’t mean you get to skip out on paying anything. If you do file for an extension you have a couple options: the first option is to pay the estimated taxes you owe by Tax Day. You likely have a good idea of what you owe given your documentation on hand and in relation to what you paid the year prior. The other option is to file and not pay until your later due date. This option is not recommended unless completely necessary because of the interest and penalty percent on underpayments you’ll accrue for every month you’re late.
The above discussion is based on current tax law and is for informational purposes only. Nothing herein should be considered individualized investment advice. C-J Advisory, Inc. is a registered investment adviser located in San Jose, CA. Registration of an investment adviser does not imply any level of skill or training and is not an endorsement of any regulatory agency. C-J Advisory does not provide tax or legal advice.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2021 Advisor Websites.