Contributed by: Tricia D, FreeTaxUSA Agent
April is approaching fast, and you’re eager to file your federal tax return. However, you’re still waiting for a document from a family estate. With a week left to file on time, you learn your grandfather's estate filing is running late and you won't receive a Schedule K-1 with your distributions until mid-May. What do you do?
If you can’t file your federal tax return by the due date, you may apply for an automatic six-month extension from the IRS using Form 4868.
Valuable information to know about extensions
- An extension does not give you more time to pay taxes.
- You should estimate and pay any tax owed by the tax deadline to avoid penalties. Income tax is generally due April 15th.
- File the extension request no later than the due date of your return.
- If you’re in a qualified disaster area, an extension is not necessary. Check this link to see if you qualify Tax relief in disaster situations | Internal Revenue Service (irs.gov)
Pros of filing a tax extension
1. Avoid a late filing penalty. This penalty is referred to as the failure-to-pay penalty, which means you filed your return on time, but didn’t pay all the tax owed on time. It’s one of the most severe penalties imposed by the IRS. It can be as high as 5% of your unpaid taxes per month, up to a maximum of 25%.
If you file an extension and pay at least 90% of your tax liability by the original due date, you will not be charged the late filing penalty. However, you will still have to pay the remaining balance and any interest by the extended deadline.
See this FreeTaxUSA article for information on the Underpayment Penalty.
2. More time to prepare your return. Filing an extension can give you up to six extra months to gather all the necessary documents, receipts, and statements that support your income and deductions. This is particularly important if you are missing documents, like a Schedule K-1 from an S Corporation or Partnership. You can also use this time to review your return for any errors or omissions, or to consult a tax professional if you have any questions or doubts.
3. Reduce stress and anxiety. Filing an extension can help you avoid rushing to meet the original deadline, which can be stressful and overwhelming. You can also avoid the hassle of amending your return later if you discover a mistake or receive information after you file.
4. Double-check all reported income. Filing an extension gives you the opportunity to check your online account with IRS for all income reported under your name and social security number. The IRS releases this information in late May/early June so it’s a great way to double check what you’re reporting on your tax return is what the IRS has on file.
Cons of filing an extension
1. Interest must be paid on taxes owed. Interest begins to accrue from the payment deadline, regardless of whether an extension is filed or not. The interest rate is determined quarterly and is the federal short-term rate plus 3%. For all IRS interest rates view this link: Quarterly interest rates | Internal Revenue Service (irs.gov)
2. Tax benefits may expire on the original due date. For example, if you want to contribute to an individual retirement account (IRA) and claim a deduction for the previous year, you must do so by the original due date, even if you file an extension. Similarly, if you want to claim a refundable credit, such as the earned income tax credit or child tax credit, you must file your return within three years of the original due date, otherwise you will lose the chance to claim it.
Before filing an extension, weigh the pros and cons and consider your specific circumstances. If you need more time to gather your documents, organize your records, or consult a tax professional, filing an extension may be a good choice for you. However, if you already have all the information you need to file your return, or if you expect a refund, you may be better off filing your return as soon as possible.
To file an extension in your FreeTaxUSA account, follow this menu path: Account > File an Extension. Follow the prompts the software provides. Filing an extension is 100% free at FreeTaxUSA and can be e-filed along with any estimated payments.
