An extension moves the filing deadline of filing your tax return from to October 15th and it has both its advantages and disadvantages.
Filing a tax extension request means asking the Internal Revenue Service (IRS) to give you additional time to file your personal tax return but generally, this does not give you extra time to pay the taxes you owe. However, this year, most taxpayers receive an automatic extension on filing and paying their taxes with all individual tax returns are due on May 17th. Both individuals and businesses in Texas, or other areas impacted by winter storm emergencies, have until June 15th.
1. Pros and Cons of Filing a Tax Extension
If you need more time to organize or are still waiting for some documents, don’t worry because approval is usually automatic. You don’t even have to explain why you need the extension as you just fill a form. However, erroneous information can trigger a rare rejection so make sure everything is correct.
Let’s start with advantages. IRS imposes two types of penalties and you can only deal with one if you ask for an extension. You can avoid the 5% per month late-filing penalty if you file your return by the extended deadline of October 15th as the late-filing penalty wouldn't begin until October 15th so all is good if you file before that date. The second benefit is that the refund statute of limitations is also extended by six months when you file for an extension. Note that there's a three-year deadline for receiving a refund check from the IRS. More importantly, it will reduce the odds of errors and give you extra time to make the best decisions and perhaps consult with a professional to minimize your tax bill. Even if you hire a professional, you can save money by shifting tax preparation to a time when accountants are less busy and therefore, charge a lower fee.
But, extension comes with its disadvantages as it won’t solve all your problems. Some deadlines remain written in stone. Contributions to a traditional IRA and Roth IRA are still due by the original tax deadline, unless you're self-employed. Married taxpayers who filed jointly before the April deadline still only have until April 15th to amend their tax returns and switch to filing separately. Last but not least, the IRS will likely think you have to file a tax return if you ask for an extension. So, if you end up not filing because you realize you don’t meet the income requirements, they might ask you for it anyway.
2. Tax Planning and Preparation Tips
Whether you do your own taxes or hire a professional for the job, keeping good records will save you time and money. The earlier you start, the more smoothly it should go, and the sooner it’ll all be behind you, at least until next year.
If you think your tax bill is carved in stone, think again. You can always take action to lower your taxes and save money when preparing your tax return.
Contribute to retirement accounts
If you haven’t already funded your retirement account for 2020, you have until the tax return filing due date to do so. Making a deductible contribution will help you lower your tax bill this year. Plus, your contributions will compound tax-deferred, so it’s a double win. The maximum IRA contribution for 2020 you can make is $6,000 or $7,000 if you were 50 or older by the end of last year.
Itemize your tax deductions
Standard deduction might be easier, but you can save money if you itemize, especially if you are self-employed, own a home or live in a high-tax area.
Know which deductions you are eligible for
For instance, if you have been working from home due to the pandemic are you able to write off some of your Ambit Energy and other household costs, including rent, through the home office deduction. In the past, may tax payers avoided it because it was seen as a red flag by the IRS, but after 2020, this really shouldn’t be a problem if you legitimately qualify.
Takeaway
Though most money-saving options to defer income or accelerate deductions become much more limited after the year ends on December 31st, there is still a lot you can do to make tax-filing cheaper, easier and less stressful.
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