If you haven’t submitted your taxes yet consider filing a tax extension. Maybe you’re missing paperwork or need more time to wrap your head around new tax laws. No matter the reason a tax extension gives you an additional 6 months to file your tax return, NO PENALTIES.
If you think that you will end up filing for an extension by April 18th, we’ve highlighted 4 reasons to consider extending. This will allow you to focus on the details to ensure your tax return is accurate and complete.
1.) You’ll avoid late filing fees
The penalty for failing to file your return on time is 5% of any unpaid taxes for each month (or part of a month) that a tax return is late capped at 25% of your unpaid taxes. If your return is over 60 days late, there’s also a minimum penalty for late filing – the lesser of $435 (for tax returns required to be filed in 2022) or 100% of the tax owed.
You’ll still be hit with other penalties if you don’t pay any tax due by the April 18 deadline. The failure-to-pay penalty is 0.5% of the unpaid amount for each month, or part of a month, up to a maximum of 25%. The penalty increases to 1% if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy property.
2.) Hindsight for retirement saving moves
For self-employed people, getting a filing extension can also provide more time to contribute to a retirement savings account. Normally, contributions to a Solo 401(k) plan or SEP IRA for the previous calendar year have to be made by the original tax return filing deadline (April 18 this year). However, if you get an extension to file your return, you also get an extension to contribute money to these types of accounts. There’s another perk that everyone gets – whether you’re self-employed or an employee – by claiming a filing extension. If you exceeded the 2022 IRA contribution limits, you get six more months to withdraw the excess funds and, thereby, avoid a stiff penalty. If you don’t claim a tax extension, you’ll have to take out the extra contributions by April 18.
3.) Amended and delayed K-1s
If any portion of your tax situation includes activity with pass-thru entities such as partnerships and S Corps, you know cannot file your individual income tax return until you’ve received K-1 from the related entity. These K-1s cannot be issued until the entity completes its tax return. We are seeing more amended and or delayed K-1s for a variety of reasons, not the least of which is the increase in the complexity of tax laws for partnerships, S-Corps, and investment structures continue to. Moreover, there is a compelling argument that partnerships may be wise to file for federal extensions before the deadline each year, whether they need to or not.