Procrastinator alert: your taxes are due! If you are nowhere near ready as the scary deadline approaches, you may file an extension with the IRS that gives you up to six more months to file your taxes. Filing an extension will spare you from late filing penalties — 5% of the amount of tax you owe for each month or partial month past the deadline. The extension is automatic — you do not have to send any justification or reasoning like “I have 5,000 wadded-up receipts crammed in a shoebox.”
The IRS and Treasury Department have extended the 2020 tax filing and payment deadline from April 15th to July 15th, due to the COVID-19 pandemic.
To file an extension, fill out IRS Form 4868, “Application for Automatic Extension of Time to File U.S. Individual Tax Return” and submit it before the July 15th filing deadline. The form and instructions are available at your local IRS office, online at the link above, or through any e-filing service.
The form is quite simple, requiring your Social Security Number for identification (and your spouse’s if you are married and filing jointly) along with your best estimate of your tax liability and the amount you are paying. Note the important distinction: an extension to file does not mean an extension to pay. You are still expected to pay the amount of taxes that you owe even though the exact amount is unknown. You still must pay interest on any underpayment, and potential penalties apply if you pay less than your tax bill.
“Filing for an extension doesn’t get you an extension to pay,” confirms Betterment Head of Tax Eric Bronnenkant. “Let’s say you don’t pay by the deadline, well then, you’re still going to have to pay interest on that money later anyway. Filing for an extension is typically a good idea if, let’s say, you haven’t gotten all your tax documents, you’ve been working overseas and you didn’t get all the information you needed from your employer, or you’ve got a complex tax return and you’re investing in complex investments. Those are good reasons to request an extension. Requesting an extension doesn’t solve any problems, if your only problem is that you expect to owe money.”
You can file Form 4868 electronically or as a paper form. E-filings must be submitted by midnight local time on July 15th; paper forms must be postmarked by July 15th. The instructions for Form 4868 will tell you where to mail your paper copies, as well as outlining your payment options if you expect to owe. You will receive a confirmation when your e-filed extension is approved, but with a paper filing, you are only notified if the extension is rejected.
How can an automatic extension be rejected? That generally happens when the basic information does not match up, although your extension may be rejected if you grossly underestimate the amount of tax that you owe. A simple error like transposing numbers on your SSN or a mismatching address that was not updated with the IRS will keep your extension from being accepted. Notification in either case makes e-filing a safer option for extensions.
Extensions may also be granted under special circumstances such as military service in a combat zone (See IRS Publication 3, “Armed Forces’ Tax Guide“), or if you are a U.S. citizen living abroad and meet certain criteria (see IRS Publication 54, “Tax Guide for U.S. Citizens and Resident Aliens Abroad“).
Unless you live in one of the seven states that have no state income tax, you will also need to file a state tax extension. The procedure for filing state tax extensions varies by state, so contact your state tax agency to verify the rules. Some states grant a six-month extension automatically, others require that you file a request.
Just as with your federal return, you still must pay your best estimate of the state taxes that you owe. If you can do so, it is best to err on the overpayment side. You will avoid any underpayment penalties and can receive a refund when you do file your state taxes.
Filing an extension can bring you peace of mind and keep you from making potentially costly tax mistakes. However, if possible, you should plan to file your taxes on time next year and avoid the guesswork of how much you owe in taxes. Keep up with any tax law changes, so that your next tax bill doesn’t catch you by surprise. Modify your filing and tracking system so that next year it consists of more than a shoebox full of wadded-up receipts.
In the interest of safety and to curb the spread of the coronavirus, all Taxpayer Assistance Centers have been closed temporarily and face-to-face IRS services have been suspended until further notice. See the IRS Coronavirus Tax Relief page for the latest updates and stay safe.
This article was provided by our partners at moneytips.com.