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Should I File A Tax Extension?

Need more time to file your tax return? This document can help you decide whether or not you should file an extension using IRS Form 4898. Filing an extension with this form asks the IRS to give you additional time to file your return for tax year 2018. Some people, such as military serving abroad, may already receive an automatic extension. If you aren’t one of those people but still need an extension, applying for one is relatively easy and requests are almost always honored. If you need an extension, you do not have to explain why you need one, either.

But what does an extension do exactly? If you are approved for an extension, it will move your filing deadline for your 2018 tax returns from April 15, 2019 to October 15, 2019. While this seems nice, there are pros and cons to weigh before you make the decision to extend.

Before you see the deadline move six months and get excited, know that the extension will not give you extra time to pay the tax you owe. No matter whether you were granted an extension, payments for tax year 2018 are due for everyone by April 15, 2019. If you can’t afford to pay in full by the deadline, an extension can help you reduce your penalties.

If you need help weighing the pros and cons of filing an extension, check the list below for the benefits and negatives!

Filing an extension: The Pros

1. Extra time to finish your tax return 6 months could be crucial for finishing your tax return if you are waiting for tax documents to arrive or if you need to get deductions in line. If you are filing a gift tax return, this also gives you extra time to finish that.
2. Late penalties may be reduced There are two types of penalties that the IRS imposes on those who file late. One is a late filing penalty of 5 percent per month on any tax due as of 2018. Two is a late payment penalty of half a percent per month.
3. If you file an extension and turn your return in by the extension deadline, the 5 percent per month late filing penalty will be avoided. If you file an extension and do not file by the extension deadline, the late filing penalty will be deferred until October 15, 2019. Tax refunds will be preserved Tax refunds have a three year deadline for those who file years after their taxes are due. The three-year deadline is a deadline for receiving a refund check from the IRS if you are owed money. If you file an extension, this deadline will be extended by six months, possibly saving you from losing an entire year’s refund.
4. More time to fund retirement plans if self-employed If you are self-employed and want to fund retirement plans for yourself, an extension will give you an extra six months to do so. While a Solo 401(k) and SIMPLE plans must have been set up during the tax year, the funding for the plans can occur up until the extension deadline.
5. More time to make decisions regarding assistance with your tax returns There are many factors that go into every tax return, and sometimes it is difficult to decide along the way whether you should receive guidance from a professional or make decisions on deductions and credits alone. Filing for an extension will give you time to decide whether you need the help of a professional. Less rush may ensure a more accurate return If you are straining to make it to the April deadline, you and even your accountant are likely to make mistakes. The extension will give you time to review your return and to fix any mistakes you may catch.
6. Extending may reduce your fees If you are getting your taxes done by a professional service, you should know that some accountants will charge a higher rush fee in the few weeks before the deadline. This fee will drop again after the original April 15 deadline has passed, possibly saving you money.

Filing an extension: The Cons

1. Extra filing time does not mean you have more time to pay As mentioned earlier, an extension does not give you more time to pay taxes owed. Even with an extension, you still must pay your taxes owed for tax year 2018 by April 15, 2019.
2. No extra time to fund an IRA or switch from Joint to Separate returns Contributing to both a traditional IRA and a Roth IRA must still be done by the April deadline. There is also no extra time for married couples to switch from joint to separate returns. Married couples will have only until April 15 to switch to married filing separately.
3. No extra time for the Mark-To-Market election for professional traders This election must be made by April 15, 2019.
4. The IRS may be confused if you ask for an extension but do not file a return If you ask for an extension because you do not know if you will need to file, you may discover that you do not need to file a tax return for tax year 2018. If you requested an extension, though, the IRS may think you need to file and ask you to file a return anyway.
5. Beginning this year, you are unable to recharacterize an IRA contribution Previously, you were able to change the nature of your IRA by the extended deadline as long as your IRA was funded by the original deadline. This is no longer the case after the Tax Cuts and Jobs Act. Now, under TCJA, conversions made after January 1, 2018 may not be recharacterized.

If you have read this list of pros and cons and decided that the pros of asking for an extension outweigh the cons for you, it is time to take the next step! Tax extensions can be filed online through the IRS. You should receive a confirmation code from the IRS notifying you that they received your electronic extension. If you would prefer to mail it, you can mail your Form 4898 directly to the IRS.