Now's the time to file for a tax extension

If you haven't started preparing your 2013 tax return, and you have more than some income on a simple W-2 and a 1099 to report, here's a plan: File for an extension instead of rushing to organize your tax information and trying to file your return by April 15.

It's best to take your time, get your tax information organized and prepare your tax returns correctly. And don't worry -- no data suggest that filing for an extension makes your return any more likely to be the target of an IRS audit.

To get an automatic six-month extension, you need to file a Form 4868, Application for Automatic Extension for Time to File U.S. Individual Income Tax Returns.

The good news is that you can do this easily -- and for free -- online. When filing an extension for your federal income tax return, log onto the IRS website and select free file service. According to the agency's instructions, you can file the Form 4868 online when you send a payment using its electronic payment options. Your extension will be automatically processed when you pay part or all of your estimated income tax electronically.

Here's what you need to know.

If you don't file a tax return or an extension by the April 15 deadline, you'll owe IRS penalties and interest.

The late-filing penalty is a stiff 5 percent per month of the unpaid balance, up to a maximum of 25 percent of the amount of tax due on the late-filed return. To avoid this, you'll need to file an extension or your tax return by April 15. Don't forget, you'll also need to file an extension for your state tax return.

Filing an extension gives you an extra six months to file your final 2013 tax return (that's until October 15, 2014.) But filing an extension does not give you more time to pay the taxes you owe. If you don't pay what you owe, the IRS will also charge you a late-payment penalty -- and interest.

To avoid that penalty, which is 0.5 percent per month, you have to have paid taxes (from withholding, estimated tax payments and what you pay with the extension) in the amount of at least:

- 90 percent of the total amount you owe, or 100 percent of the tax you paid on your previous year's tax return (this is 110 percent if your adjusted gross income is over $150,000).

To avoid paying additional interest on an unpaid balance (that's right, the IRS can charge the penalty mentioned above and interest on late payments!), you have to pay the full amount of the tax liability you owe. The current interest rate for late payments is 3%, so it's not such a big a deal.

If you haven't prepared your 2013 tax return, how would you know the tax you should pay to avoid underpaying when you file your extension? The answer: You'll need to calculate a reasonable estimate of taxes you owe and submit a payment with the Form 4868.

The best way to come up with that estimate is to prepare your tax return with the information you have on hand and make good-faith estimates where you need figures for information you haven't yet received or haven't organized.

Again, you'll have to do the same for your state tax return, and most states will let you file an extension and make tax payments on their websites.
  • 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 and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.