The Implications of Filing a Tax Extension
A tax extension gives you extra time to file your tax return, but have you ever paused to consider all of the implications of filing a tax extension?
If done correctly, filing a tax extension can give you some much-needed breathing room to file your taxes and even help you save thousands of dollars in the process. In this post, we'll look at all of the benefits and disadvantages of filing a tax extension.
Benefits of Filing a Tax Extension
There are many benefits to filing a tax extension if you file it properly. Here are just a few:
Extra Time to File
The most obvious benefit of filing a tax extension is that it gives you extra time to file your tax return. In fact, you'll get 6 extra months, which will extend your filing due date from April 15th to October 15th.
Why worry about filing your taxes in April when you can wait until October?
Avoid Late Penalties
Another major benefit of filing a tax extension is that it allows you to avoid the late-filing penalty. Failing to file your taxes by the deadline results in a 5% fee on your taxes owed for each month or part of a month that you fail to file. The penalty maxes out at 25% of your taxes owed.
The good news is that if you file a tax extension, you'll avoid the late-filing penalty. Depending on what you owe in taxes, simply filing a tax extension could save you thousands in penalties on your tax bill.
Additional Time to Make Elections
Knowing if you qualify to take certain credits and deductions can be difficult. When you file a tax extension, it gives you extra time to research which deductions you can take.
Taking some of these elections may save you thousands on your taxes, so taking the extra time to see if you qualify is well worth the investment.
Improve the Accuracy of Your Return
Rushing to file your taxes often leads to mistakes. Errors on your tax return can be extremely costly and may result in penalties and fines. Filing an extension gives you extra time to ensure all of your tax information is accurate.
Preserve Your Refund
Typically, you have three years from the April 15th due date to claim your tax refund if you're owed one. However, if you file a tax extension, youll have three years from the new extended deadline (usually October 15th) to claim your refund.
Fund Your Self-employed Retirement Plan
If you're self-employed, filing an extension gives you extra time to contribute to SEP IRAs, solo 401(k)s, or simple IRAs. This may be one of the biggest benefits of filing an extension, as it gives you six extra months to meet the contribution limit for a given tax year.
Disadvantages of Filing a Tax Extension
As you can see, filing a tax extension comes with a ton of advantages. However, if you don't take certain precautions, there can be some disadvantages to filing a tax extension.
Extra Time to File Doesn't Give You Extra Time to Pay
If you expect to owe money when filing your taxes, filing an extension does not give you extra time to pay those taxes. You need to have a fairly good estimate of what you will owe the IRS when you file a tax extension and pay It at the time of filing your extension.
While filing an extension helps you avoid the failure-to-file penalty, you still will be assessed the failure-to-pay penalty if you don't pay your taxes by April 15th. The failure-to-pay penalty is 0.5% of the taxes owed for each month your taxes go unpaid and gets capped at 25%.
How to File a Tax Extension
The potential benefits of filing a tax extension far outweigh the disadvantages, especially if you're able to pay your taxes when filing an extension.
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