Time Friendly Steps To Take to Get A Tax Extension
Every year in the US, April 15 looms in people's minds as the deadline of all deadlines. Tax Day. It's not the end of the world as they know it, but for some who did not prepare properly and exhibited poor tax management skills, it seems scarier than a battle between Jason and Freddy.
If you just totally missed out on the tax preparation, then you probably need a tax extension. This is really easier to get than you might imagine.
How to Get a Tax Extension
Contrary to many people's belief, the government is not the enemy. The Internal Revenue Service (IRS) merely collects taxes from citizens that allow the government to pay for the roads you drive on, the social security offices, the public education, etc. The IRS actually sets up help centers and mans a phone bank to help people with tax questions throughout the year. So, when you turn up needing a tax extension, they are pretty friendly about it.
Of course, you do have to file the right form, in triplicate, signed in the blood of your first born plus buy them lunch. Okay, I'm kidding about everything except the form. The IRS has a form for everything. You have to complete the right one to actually get the extension.
Major Caveat!
While an extension gets you additional time to prepare and file the taxes, you do not get a break on when you owe the taxes. That means, even with the extension, you will incur late charges that the government refers to as tax penalties.
As the IRS puts it:
"Please be aware that an extension of time to file your return does not grant you any extension of time to pay your taxes."
Filing Your Tax Extension Forms
You do not need to mess with paper, if you do not want to do so. You can e-file your tax extension form, just as you can your tax forms. You do this for zero cost by using the free file option on the IRS website. Free filing is available to individual tax filers.
What the Heck Form Do I Need?
Glad you asked. It depends.
4868 Form
If it is just you, file Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return.
7004 Form
If you need a tax extension for your business or corporation, file Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns.
The IRS and Special Rules
The IRS creates special rules for special people. What qualifies you as special and what does it get you?
The people in the spiffy special category get an even easier way to do things. Special rules apply if you are:
serving in a combat zone
serving in a qualified hazardous duty area
living outside the US
You can avoid the tax extension form if you fall into one of these categories. Instead, you will pay "all or part of your estimated income tax due" and mark it as an extension payment. You need to use Direct Pay, the Electronic Federal Tax Payment System (EFTPS), or a credit or debit card. You get a confirmation number this way, too.
A Little Background On Taxes
In 2015, 141.2 million Americans filed personal taxes. Their tax returns showed they earned $10.14 trillion in adjusted gross income. They paid $1.45 trillion in taxes which the government used to operate and offer services to citizens.
According to data analysis, the individual income taxes tend to be progressive, with higher-income earners paying a huge chunk of taxes. On average, Americans spend more than $10,000 each year on the combined cost of federal, state, and local income taxes.
Who Must File Taxes
In the US, federal law requires you to file taxes if you earned a specific income level. If you earn more than $10,000 in gross income or more than $400 from self-employment, you must pay taxes on it and file a federal income tax return.
Some People Don't File
Factually, some people do not file their taxes. Some do not make $10,000 per year, so they do not see the point. Others make illicit income and do not file because they have no way to explain their income. Others simply do not feel the need or do not agree with the tax laws. Someone who would have owed taxes, but does not pay them puts themselves in jeopardy of tax fraud.
Consequences of Tax Fraud
If you willfully commit tax fraud or tax evasion, the IRS can prosecute you. If you get convicted, you will serve jail time.
If that sounds scary, it should. The government offers all the services you depend on daily by funding them with the taxes you pay. When you do not pay taxes and you owe taxes, you gip the government out of money it needed to build or upkeep drivable roads, run schools, offer health care services like Medicaid and Medicare, and pay for the school lunch program that feeds millions of poverty stricken children every day.
You Are an Employee
If you work as an employee of an organization, you can have it withdraw a tiny part of your paycheck each pay period to build up the tax amount you would normally owe at the end of the tax year. This method helps you budget the appropriate amount so you can save the tax money in an account from which you cannot withdraw. This process is called withholding taxes.
Since people tend to request extensions because they do not have the money to pay on time, using appropriate witholding fixes this.
You Are Self-Employed
If you work for yourself though, you may not have any amount withdraw automatically via withholding. That's where budgeting comes into importance. You have to set aside the funds to pay the IRS the taxes you owe. That means you need to figure out what you owe in advance. You need to know how much you can earn before you will have to pay taxes. You can simplify your life that way.
It is vital that you comply with the law. Knowing at what earning level your tax liability kicks in can help you immeasurably. You need to calculate your taxes to do this. This means knowing your available tax breaks. Your home business, for example, would allow you to take certain deductions from the taxes you owe.
Renting office space similarly provides a deduction, as does your office equipment and supplies. Your equipment will be subject to smaller deductions each year until it reaches zero. You are probably already familiar with this concept if you own a car since the same applies as soon as you drive it off of the lot. You call this depreciation.
Getting Started with Taxes
You can avoid needing a tax extension. Get started learning how to handle your taxes by visiting Taxry.com. It provides free educational tax tools like this blog. It can help you plan ahead, so you get your budget set up and maximize the most out of your earnings.
Keep in mind that the types of taxes differ. You may owe more than just federal and state income tax each year.
Tax Defined
In fiscal terminology, the term tax refers to a compulsory financial charge levied on individuals and businesses enforced by the government. Typically, a tax gets imposed on a variety of taxpayer activities including:
expenditure
income
property
enjoyment
privilege
occupation
While all the rules of the IRS may seem confusing, frustrating, or just outright vexing, if you spend a little time reading about taxes and get a feel for how things work, you can easily get a handle on things. When you fully understand a topic, you are much less likely to make a mistake. When you know the tax rules, you know what records to keep, how to organize them and what you can and cannot claim on your taxes.
Tax Types to Know
You will need to may tax types throughout your life. This includes:
federal income taxes
state income taxes
excise taxes
property taxes
sales taxes
estate taxes
You typically will only apply for a tax extension for income tax though.
Why Would You Need a Tax Extension?
Here's the deal. According to the IRS, you do not need a reason. Seriously. For real. You can, if you desired, randomly request a tax extension. Of course, you would be incurring a tax penalty to anything owed. Here are some tax tips for you.
You may have an extra six months courtesy of the IRS, if you ask nicely using the appropriate form. If you are a business, you typically get five months. In addition to the paper file method and the e-file, you can file for a tax extension using various filing software.
Take Time to Learn Everything You Need about Taxes
So, procrastination qualifies, but so does any reason. You can get more time to prepare your tax return so you can take advantage of new tax breaks. That means you just need to turn in the tax extension form by the due date of your taxes. For a business, that is typically March 15, for individuals, it is April 15.
You gain extra time to study the tax laws, so you can prepare a better return that leverages more deductions. Claim every tax credit for which you qualify. Congress and the IRS constantly update the tax laws. This can overwhelm individuals, businesses, even some CPAs and financial planners. You can have extra time for new deductions that you couldn’t claim before.
You make mess mistakes on your taxes when you are not rushed. Rather than hurry through your taxes, you can take your time and do it right. Meet with your CPA. Discuss new tax law changes. Research which of the prior year's expenses qualifies for a deduction or exemption. Taking your time can save you money.
Avoid IRS Audit
Specific types of tax returns fall subject to IRS auditing because they raise red flags. The IRS usually fills its audit quota in April though as returns get filed. You tax extension can save you from this.
Avoid the Tax Payer Crowds in April
You will avoid the most hectic months for your tax preparer - March and April. This means you obtain better counsel and reduce errors on your return. Your CPA will have more time to spend with you. You also gain a little peace of mind, knowing that you won't have to fight the lines at the post office or try to submit during a time of high-speed data crunch.
You do not have to wait for Tax Day. You can file for an extension before that. If you file on April 15, you will obtain a filing extension that expires on October 15.
Unexpected Ocurrence
Let's say life is marching along as it should when something completely unexpected occurs. Perhaps you go into premature labor. Maybe you have a car accident. Perhaps a tornado or fire occurs at your home office or your business office. Whatever the reason, you can apply for the IRS to grant you an automatic six-month extension. If you know that the events that happened a week before taxes are due are much too cataclysmic to allow for timely filing, you can quest the extension then.
Avoiding Penalties
Okay, avoiding tax penalties could be impossible. Here's the catch 22... to avoid a penalty, you must pay your taxes by the 15th of April, but to know how much you need to pay, you have to have completed your taxes. You could estimate and then pay that amount, but then you will probably miscalculate and need to file an amended return. Alternately, you can change the tax penalty and file for a tax extension.
You Don’t Owe Any Taxes
This works if you truly believe for a valid reason that you will not owe any taxes whatsoever. If you have a valid reason to believe that you will owe zero dollars, go for it. File for the tax extension without paying any taxes.
Here's why. Any percentage of zero is... you guessed it - zero. The IRS penalties are percentages of taxes owed, not a flat rate. So, Uncle Sam, does not charge you a $10 late fee or $100 per month. Uncle Sam says, "Meh, kid, you were really late, but you owe me nothing, so I'll charge you nothing." If only banks and credit cards were that cool, right? See? I told you the government wasn't so bad.
But, What About If You Do Owe?
Well, then, you need to estimate. At this point, realize that if you could file on time, you may as well. You can always amend your return to claim the additional deductions you found. You do not need to have your W-2s or 1099s to estimate your tax liability. You can obtain the same numbers that are on your W-2s from your final December pay stub. Most employers save these online, plus you would have a hard copy from the paycheck you received.
You can manually add together your earnings as an independent contractor to obtain the numbers on your 1099s. When the forms come to you, you can file an amended return.
You Owe A Lot
Hey, it happens. Maybe you did not have work withhold enough. Maybe you just opened your business and had no idea about how to estimate taxes. Perhaps you have had the same business for many years and it earned the same profits continuously. You got into a groove of the tax amounts owed, then you had a banner year. You outdid every sales figure you ever had. Suddenly, you owe way more than ever before. Way. More.
Deep breath it. You will be okay. You will owe less by paying it on March or April 15, whichever applies. That means you need the money now.
Get a Loan
Visit different financial sites or apps to learn about the various types of loans and credit cards available to you. You might find a low interest personal loan, a business loan or a credit card that fits your needs. For example, various sites make a soft hit on your credit report to obtain a credit score for you and you can get information about the names and websites of a number of financial lending institutions that extend credit to individuals in your financial situation.
That saves you from needing to sift through tons of lenders to find the best ones to which you could successfully apply. You can quickly find the lenders who typically extend loans to people just like you. No hard hit occurs on your credit report until you apply for an actual loan. You could potentially obtain a low interest credit card or loan that lets you pay the taxes with no penalty. So long as the interest rate remains lower than the penalty, you still save money.
While the IRS will grant you a tax extension, it will not extend the due date for paying your taxes. Maybe you thought you could "recharacterize" your Roth IRA back into a traditional IRA before you file your tax return, but the conversion is taking longer than you want. Grab an IRS extension.
How Bad Are the Late-Payment Penalties?
So, what will you pay the IRS compared to a financial lender?
If you do not pay the tax you owe by Tax Day, the IRS charges you one-half percent each month on the amount of tax you owe. Once October 15 rolls around, if you still miss the date, the IRS penalty increases to 5 percent per month. Your maximum penalty can come to 25 percent of your taxes owed. Ouch! So, if you owed $1,000 in taxes on April 15, but missed that due date and the extension date, you could end up owing a $1,250 instead. That's kind of ridiculous if you could have stuck it on a credit card for a month or two at five percent interest, then filed with your finances in order so that you only owed $500.
Maybe you think over withholding is just as bad. You think you could put it in the bank and earn interest on it. But will you?
It actually is better to over withhold if it is the only way to force yourself to save. If you would spend it, you need to withhold more out of your paycheck. Better to give an interest-free loan to the government than to incur interest penalties on what you owe to the government.
Take the Refund
Enjoy the refund. It would be best to save it or buy a certificate of deposit with it, unless you have a credit card or loan that needs paying off. In that case, pay the loan. You will save yourself interest payments.
To Sum up
Study the tax rules and learn the various rates. You must differentiate your income just as the IRS does. The tax authorities see the monies that comprise your gross income differently and each gets taxed at a different rate. That means that salary, investment income, prizes and awards, bartered goods and services all get taxed differently though they all contribute to your adjusted gross income (AGI).
The easiest way to avoid problems is to hire a certified public accountant (CPA). This individual will monitor tax laws for you and help you prepare your taxes. You can hire an online service that provides you with a tax consultant or CPA part-time.
Ultimately, filing your taxes on time tops anything. You need to avoid angering the government. The IRS is your friend while you file in a timely manner. You raise suspicion though if you typically earn a normal income and suddenly do not file your taxes. All you need to do is request an extension before your taxes are due and ensure that you pay the proper amount on Tax Day. You can have additional time to file and you can find more deductions to save you money.