How to Decide if You Need a Tax Extension (and things to know before you file for one)

a few pieces of financial paperwork, with a calculator and a printed sign that says "TAXES"

Even the brightest minds have found tax season daunting. Albert Einstein reportedly once quipped that “The hardest thing in the world to understand is the income tax.” Tax extensions might be the second hardest. 

As the tax season approaches, many individuals find themselves facing the looming deadline of April 15th. Sure, the annual deadline never changes, which means we all should have ample time to prepare and file in a timely fashion. 

Regardless, this deadline inspires plenty of stress and uncertainty, especially if you’re not prepared to file your taxes on time. This is where tax extensions come into play, which is great! But how do you know if you truly need one? And what should you consider before filing for an extension? 

We’ll take you through the brass tacks of tax extensions and remind you that our team is standing by to step in anytime you want to turn your tax prep over to the pros. 

First things first, assess your situation. 

Before jumping to the decision of filing for a tax extension, take a moment to assess your situation. 

In order to do that, it can help to zero in on some specific questions, such as:  

  • Do I have all my necessary documents?

Review your financial records and ensure you have all the required documents to accurately complete your tax return. If you’re missing crucial information, it might be wise to consider an extension in order to allow ample time to secure whatever records, receipts or financial information is missing.

  • Is my tax situation complex?

For many people, the answer is yes! For instance, if you’ve experienced significant life changes such as marriage, divorce, buying or selling property, or starting a business, your tax situation is likely more complex. In such cases, filing for an extension can provide the necessary time to ensure accuracy.

  • Am I in a rush?

As with most endeavors, rushing through your tax return increases the likelihood of errors. With respect to taxes, these mistakes can result in penalties or audits. Check in with yourself and if you feel rushed or overwhelmed, consider a tax extension and catch your breath. 

Understand the Extension Process

Filing for a tax extension isn’t complicated, but there are some essential things to know before proceeding:

  • Extension deadline: While filing for an extension gives you more time to submit your tax return, it doesn’t extend the deadline for paying any taxes owed. The extension merely grants additional time to file the paperwork. Therefore, it’s crucial to estimate and pay any owed taxes by the original deadline to avoid penalties and interest.
  • Extension form: To request an extension, you’ll need to fill out Form 4868 for individuals or Form 7004 for businesses. These forms can typically be filed electronically or by mail.
  • Penalties: While an extension grants you more time to file, it doesn’t exempt you from penalties for late payment. If you owe taxes and fail to pay by the deadline, you may incur penalties and interest on the unpaid amount. What kinds of penalties? The failure to pay penalty equals 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid. 

Consider Alternatives

Before opting for a tax extension, consider alternative options:

  • Payment plans: If you’re unable to pay your taxes in full by the deadline, consider setting up a payment plan with the IRS. This allows you to pay off your tax debt in installments, reducing the risk of penalties and interest.
  • Professional assistance: If you’re unsure about your tax situation or need help navigating complex tax issues, consider seeking assistance from a tax professional … like us!  Our team will provide specific guidance tailored to your personal circumstances and ensure worry-free compliance with tax laws.

The takeaway on tax extensions

Deciding whether you need a tax extension requires careful consideration of your individual circumstances. While extensions can provide valuable time to gather necessary information and ensure accuracy, they’re not suitable for everyone. 

Understanding the extension process, potential penalties, and alternative options is essential in making an informed decision. Remember, it’s always better to file your taxes accurately and on time whenever possible to avoid unnecessary stress and potential financial consequences.

By weighing these factors and understanding your options, you can make the best decision for your tax situation and alleviate some of the stress associated with tax season. Whether you ultimately decide to file for an extension or proceed with filing your taxes on time, being informed is key to a successful tax season.

And so is partnering with the right professionals. Our Cove Professional Services team has a proven track record of helping our small business clients manage their taxes in a timely, compliant fashion. 

“I worked with Joseph Rodrigues/Cove Professional Services on my 2021 tax returns thus far, and he is a phenomenal accountant! Joseph came highly recommended by my brother and exceeded all my expectations. He is professional, knowledgeable, timely, and responsive. He is personable, helpful, kind, and patient. He guided me through the steps and took the time to help me understand the process. He helped make everything easier for me. I highly recommend Joseph as your accountant!” – W. Oei

With tax season upon us, time is of the essence! 

Contact us today to schedule your free consultation!