Why Filing an Extension Can Be a Good Idea
I haven't even gotten started on my 2010 tax return. Needless to say, I'll be filing an extension instead of rushing to finish and file my tax return by the 2011 tax day.
If you need more time to get your taxes done right, then file a Form 4868, Application for Automatic Extension for Time to File U.S. Individual Income Tax Returns. If you don't file a tax return or at least an extension, then you'll owe IRS penalties and interest for not filing.
The penalty for not filing your tax return or an extension is a stiff 5 percent per month up to a maximum of 25 percent of the amount of tax due on the late-filed return. Remember, you'll also need to file an extension for your state tax return as well.
Here's the deal; filing the Form 4868 gives you an automatic 6-month extension to file your final 2010 tax return. But it does NOT give you an extension to pay the taxes you owe.
You'll need to also make a reasonable estimate of taxes you owe and submit a payment with the Form 4868. You can come up with an estimate of the tax you owe by making a good faith effort to prepare your tax return with the information you have on hand and making good-faith assumptions where you are missing information.
To avoid a late payment penalty, you have to have paid (from withholding, estimated tax payments and what you pay with the extension) at least 90 percent of what you estimate you owe, or pay 100 percent of your 2009 tax liability. If you want to avoid paying any additional interest for paying late, you have to pay the full amount of the tax liability owed. The current IRS interest rate for late payments is low, so it's not that big a deal.
Filing an extension is free. For your federal income tax return, you can log onto IRS.gov and use the free file service on that site. Again, you'll need to do the same for your state tax return and most states will have this feature available on their web sites.
It's a good idea to file an extension especially if you need more time to do a thorough job preparing a tax return. Especially if in 2010 you had to deal with a lot of new tax issues. Here are a few reasons why filing an extension is a good idea:
Claim All Available Credits:
With so many new tax credits available (Making Work Pay, Vehicle Sales Tax Deductions, American Opportunity Credit, tax credits for Energy Saving Home Improvements, etc) you'll want more time to do your research and make sure you are taking advantage of every credit you qualify for.
Give Tax Preparer More Time:
If your tax preparer is really bogged down, ask him to file an extension now. This will give him more time to finish your return later when he can give it his full attention and do a more thorough job.
Include Corrected Forms:
Many financial institutions are still sending corrected forms 1099 with revised amounts for qualified dividends and foreign taxes. Taxpayers with investment income may want to file an extension if they typically receive a corrected form 1099.
And don't worry - filing for an extension doesn't make your return any more likely to be the target of an IRS audit.
Ray Martin
View all articles by Ray Martin on CBS MoneyWatch»
Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.
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