Many people think a tax extension is going to solve all their problems. Your CPA tells you they are extending your return – in your mind, you may be thinking “great, I didn’t have the money to pay for my taxes on 4/15 anyways” or “I didn’t have my income statements for my rentals cleaned up.” However, just because you are getting an extension doesn’t mean your payment disappears and you will never have to prepare your rentals income statement. Here are a few important extension facts to reference to determine if an extension is right for you.
An Extension Isn’t an Extension to Pay
When you file a tax extension, you’ll get an extra 6 months to file your taxes. What this means is you can file your return in October, but you have to pay on April 15. An extension to file is NOT an extension to pay. Regardless of when you file your tax return, if you do not pay the tax you owe by the original tax filing deadline (usually April 15), the IRS penalties can be severe. The IRS will charge you one-half percent each month on the amount of tax you still owe after the deadline.
No Extension for IRA Contributions
Lastly, if you think you’ve found an IRA-contribution loophole in the tax process, you didn’t. An extension to file does not extend the time you can make an IRA contribution and get a tax deduction for your contribution on your taxes. The deadline to make an IRA contribution is the same as the tax deadline, April 15th.
Incomplete Tax Documentation or Unexpected Life Events
Both of these are great reasons to extend your return. Although the IRS does not need an explanation when you apply for an extension it is important to communicate this with your CPA so they can properly extend your return. For example, you still need to clean up your rentals income statements or you lost your W-2 and are waiting for a duplicate - those are both reasons to extend your return.
It is not a bad thing to extend your return. The biggest take away should be that extensions are not an extended time to pay! However, if you were not ready for this tax season and you have no idea where that 1098 mortgage statement is, let your CPA know. Better to know if you will want to extend sooner rather than later.