This article was last updated on April 18, 2011.
The IRS gave procrastinators a gift this year: an extra three days to make yourselves crazy! But now the deadline looms: Individual taxpayers have until midnight tonight to file their returns. The reason: Friday, April 15, was a legal holiday in the District of Columbia — and because D.C. holidays affect tax deadlines in the same way federal holidays do, all taxpayers are being given an extra three days to file their returns.
Even so, there are a lot of reasons why you might not cross the tax filing finish line by April 18. Maybe you’re a little pinched for time right now. Or you bought a house last year and want to claim the homebuyer tax credit. Or you just may be out of time, without all the necessary paperwork to fill out your return perfectly.
By filing a tax extension now you’ll get more time and will avoid penalties. You don’t even have to come up a dog-ate-my-homework excuse — any taxpayer can get a six-month filing extension, taking you to October 15. (This is not, however, a payment extension; you still have to pony up any taxes you owe.) And U.S. citizens living overseas get an automatic extension until June 15. The one thing you cannot do is to just ignore tax day, figuring you’ll get your return in when you can. The IRS doesn’t like that.
Follow these filing extension tips for any of these three common situations:
You’re Strapped Financially
If, like millions of others, you became an accidental consultant last year, your savings account is probably depleted, but that doesn’t mean you don’t have to pay taxes. In fact, you may have just discovered the painful truth that freelance income is taxed at a higher rate, since you don’t have an employer to share your Social Security levy.
Send the IRS a check for as much as you can by April 18 along with Form 4868, the automatic filing extension. (Here as well as with other forms we mention here, links will take you to the PDF on the IRS Web site.)
Estimate your tax bill by comparing your 2010 income with your 2009 income and the taxes you paid with that return. If your 2010 income was much higher or lower than 2009, find your '10 tax bracket to rough out your tax bill. If your cash flow allows it, pay at least 90 percent of what you owe to prevent the stiff late payment penalty: 5 percent a month, up to a maximum of 25 percent of the tax due.
You’ll owe 4 percent interest on any late payments when you do send in your actual return, but that rate isn’t terribly onerous. “When you file an extension, it’s not a bad interest rate if you don’t have the money — certainly better than borrowing on a credit card,” says Tom Wheelwright, a CPA in Tempe, Ariz. “And it’s only a civil penalty; you won’t go to prison for paying late, especially if you pay by the extended due date of the return.”
If paying your taxes will cause severe financial hardship, consider filing Form 1127 by April 18. It’s the form to use when you can’t sell assets or borrow to pay the tax except under terms that would cause extreme financial loss. You’ll need to provide a statement of assets, liabilities, and money you’ve received and paid out for the three months preceding April 18. If the IRS grants you this extension, you’ll generally have six months to pay and file your taxes. Late payment penalties will be waived, but you’ll still owe interest, according to accountant Mackey McNeill, of Covington, Ky.
You Bought a House
You may want to file an extension if you plan to claim the home-buyer tax credit. It’s a tricky credit to file, and it’s an audit red flag, so if you need more time to get it right, just file for an extension and take the extra care.
Sales that closed by June 30 may qualify, but only if a contract was in place by April 30. First-time buyers are eligible for a credit of up to $8,000; there’s a separate credit of up to $6,500 for repeat buyers.
To claim the credit, you must file a paper return — not an electronic one — and attach Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, as well as a copy of a settlement statement.
You Just Need More Time
- 16 Don’t-Miss Tax Deductions
- Tax Crunch? Last-Minute Dos & Don’ts
- 9 Tax Mistakes NOT to Make
- Audit Red Flags: 8 Things Not To Do
- What’s Your Tax Bracket?
- Worst Tax Mistakes That Couples Make
The old rule for carpenters — measure twice, cut once — applies to tax returns as well. Better to file an extension if you have any doubts about your 1040. One common holdup: You may need more time to get all the forms listing income you received last year. For instance, self-employed people might still be waiting for 1099 forms from clients. “I always tell clients it’s better to file an extension and take the extra time to get your returns completed properly than to rush to meet that deadline and then later on wind up having to amend returns to correct mistakes,” says Joseph Anthony, a tax pro in Portland, Ore.
Anyone who suffered through a financially wrenching 2010 might just want to take the extra time to track down every available tax break. (Check out the 16 Deductions Not to Miss.) “Losing a job or losing a home to foreclosure could contribute to a need to extend a return,” says Wheelwright. “You’ll want to find more deductions and credits to decrease your taxes because you’re hurting financially.”
MoneyWatch editor-at-large Jill Schlesinger contributed to this article.
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