March 1, 2021
Understanding your tax responsibilities
Plenty of obstacles can keep you from filing your taxes by April 15. If you’ve received a tax extension, you’ll have an additional six months to prepare your tax return, pushing the new deadline back to October 15. However, your tax extension does more than push back your filing date. Here are a few other factors to consider once you’ve been granted a tax extension.
Understand what an extension entails
Now that you’ve received a tax extension, it’s critical to understand which deadlines have been pushed back — and which ones have stayed the same. While a tax extension pushes your tax return filing date back to October, it doesn't change when your taxes are due. You will still have to pay the taxes that you owe, partially or in full, by April 17.
Pay anything that’s due
Even if you can’t pay the full amount of your taxes, pay as much as you can, advises Matthew Frankel, a contributor to The Motley Fool finance blog. You’ll have to face different amounts of penalties and interest based on what you still owe. You can figure out how much money to send to the IRS with a tax estimator, available through services like Turbotax. If you pay below 90 percent of your taxes, you’ll face penalties and interest on the balance. In 2018, the IRS interest rate was 5 percent annually, compounded daily, while the penalty is 5 percent interest on the balance, compounded monthly, maxing out at 25 percent. This can add up quickly — but if you pay 90 percent of the balance or more, you won’t have to face penalties. Interest charges still apply.
Make the most of your time
While a tax extension may push back your filing date by six months, you should make the most of that extra time. If you were rushing to have your taxes done by April 15, your paperwork may contain errors. William Perez of The Balance recommends that you use this extra time to fix mistakes and find any deductions or credits you may have previously missed. Furthermore, Perez suggests that selfemployed people use their tax extension time to fund their retirement accounts. While SIMPLEIRA and 401(k) plans need to be established during the tax year, you can use the sixmonth extension to fund them for the prior year. If you create a SEPIRA, you can open the account and fund it in the same year. However, the April 15 deadline still applies to funding your Roth IRA or Traditional IRA.
Think About Your Refund
According to personal finance writer Beth Braverman, the IRS distributes tax refunds several weeks after receiving your tax returns. In other words, the sooner you file your taxes, the sooner you’ll get your refund. As mentioned earlier, there are advantages to using the extra time from your tax extension — just don’t forget about the extra money that could be lining your bank account or paying your bills.
Taxes can be confusing and overwhelming, but help is readily available. If you need help filing an extension, preparing your taxes, finding deductions or claiming tax credits, consult a tax expert