Don't File an Income Tax Extension Until You Read This!

Tax day is right around the corner and suddenly you realize you're not quite ready to do your taxes. So the idea of filing a tax extension comes into consideration. It's a very common scenario, but is that the best decision for your situation?

Let's dive in and discover if filing a tax extension is the right move for you.

So in today's blog, we're tackling a topic that's super important for both individuals and small business owners as the tax deadline approaches, and that is, Filing an Income Tax Extension.

Before you decide to file a tax extension which extends the due date of your tax return, there are some key things you need to know, so read on. At the end of this blog, I'll share a great little trick to avoid underpayment penalties.

But first, let's talk about what an extension is and isn't.

What is a Tax Extension?

A Tax Filing Extension gives you extra time to file your taxes. It's NOT an extension to pay the taxes you owe.

That's right. If you owe money to the IRS, you're expected to estimate and pay what you owe by the original due date of April 15.

For Individuals, the form you'll need is Form 4868. This gives you an additional 6 months to file your tax return until October 15. However, if you don't pay the taxes you owe by April 15th, you most likely will owe penalties and interest.

For small business owners, the process depends on your business structure. If you're a sole proprietor or single-member LLC, you'll still use Form 4868. But if your business is a corporation or partnership, you're looking at Form 7004, which also extends the filing time by six months.

Now, why might you consider filing an extension?

Maybe you're waiting on some documents or maybe you just got too busy. An extension gives you that much-needed breathing room without the stress of the ticking tax clock.

But beware, an extension to file, is not an extension to pay. I can't emphasize that enough.

If you underestimate what you owe, the IRS will charge you a penalty and interest on the unpaid balance from the original due date. And if you missed the extended deadline, well, you're on the hook for a late filing penalty.

The reality is when people hear that their tax professional needs to file an extension for whatever reason, they freak out or panic because they don't want to owe penalties and interest.

Sure, everyone wants their tax returns filed on time, but it's not always possible. Maybe the return is complicated. Maybe your tax pro has too much work on their plate, or maybe it's just too close to the filing deadline and they just need more time.

It's a valid point, but do you know that if you're due a refund when you file an extension, then there would be no late payment penalty calculated since, well, you're due a refund?

For S Corporations and partnerships, since these are passed through entities, the late filing penalty is about $200 per month, per shareholder for up to 12 months. This penalty can really add up, but there are techniques to get the penalty abated.

Check out this video for more information on getting penalties abated.

Here's another pro tip.

If you need to file an extension for yourself, for your personal taxes, the easiest way to do this is to go to the IRS website, irs.gov/payments, and make a $1 payment on Form 4868. This automatically grants you a six-month extension without any hassles.

Next up, what if you need to file an extension but don't know how much to pay?

This is a great question and as I've mentioned earlier, an extension is an extension to file and not an extension to pay. Any taxes owed are due by the original April 15th filing deadline.

Again, you'll need to get out your calculator and figure this out. If you're not sure how to do that, then reach out to a tax professional since that's what they do.

Just note that if you overestimate what you owe, you'll get that back in the form of a refund when you do eventually file your taxes.

So to recap, an extension only gives you more time to file your tax return, not more time to pay any taxes that you might owe.

So gather up all your documents, and make an accurate estimate of what you might owe, if anything. And remember, while the extra time can be helpful, it's not a free pass to delay payment.

How to Avoid Underpayment Penalties?

To avoid regular April 15th underpayment penalties, all you need to do is pay 100% of the prior year's tax or 90% of the current year's taxes owed.

It's an IRS safe harbour. This is relevant for people who file their taxes by the April 15th deadline.

So that's it. I hope you gained some valuable insights from this. Thank You for reading and see you in my next blog post!