Mar 2, 2023 Maximize Your Tax Benefits: Why Filing an Extension is a Smart Move
As accountants, we often hear people express reluctance to file an extension for their tax returns. There is a common misconception that filing an extension looks bad or is an audit risk, but that is simply incorrect. Filing an extension can be beneficial for you in many situations.
Here are some reasons why filing an extension is a good thing:
More accurate information
You may receive corrected 1099s or other important tax documents after the original due date. By filing an extension, you have more time to gather accurate information and avoid mistakes on your return.
More time to file a superseding tax return
If you need to make changes to your tax return after filing, you can file a superseding return by the extended due date. A superseding return is a tax return filed after an initial filing but before the due date (extended due date if an extension was filed). Many beneficial tax elections can only be made on an initial or superseding return but not an amended one. Filing an extension gives you more time to file a superseding return if you receive more accurate information between the initial and extended due dates. This differs from an amended return filed after the due date (or an extended due date if an extension was filed). A superseding return replaces the original in the IRS system, while an amended return is considered an additional filing.
More time to receive an SSN
If you have a child who does not yet have a Social Security Number (SSN), it is recommended to file an extension. You can only receive the child tax credit if the SSN was received by the due date of the return. If you file an extension, you are giving yourself more time to get that SSN in the mail by that later due date.
Extend the statute of limitations for claiming a refund
You can claim a refund for up to three years from when the tax return is filed or two years from when the tax is paid, whichever is later. By filing an extension and by the extended due date, you are extending the statute of limitations to claim a refund if you discover you need to amend an earlier return to claim a refund.
Avoid rush fees
Many accountants charge a rush fee if documents are received close to the deadline. By filing an extension, you can avoid this rush fee and have more time to prepare your return.
Fewer penalties
The penalty for filing a later tax return is much more severe than paying late. The penalty for late filing is 5% of the tax due, while the penalty for late payment is .5%! By filing an extension, you are protecting yourself in case you do not end up filing by the initial due date, which saves you a lot in late filing penalties. Keep in mind that an extension is only an extension to file, not an extension to pay, so you will still have late payment penalties if you do not pay by the original due date.
Retirement contributions
If you need more time to contribute to certain self-employed retirement plans, such as a SEP IRA, filing for an extension can give you that time. Filing an extension also gives you more time to pull out excess contributions to traditional and Roth IRAs, avoiding penalties.
In conclusion, filing an extension for your tax return is in your best interest. By taking advantage of the extended due date, you can avoid rush fees, gather more accurate information, and even claim more refunds. As always, we recommend consulting with your tax associate to discuss your specific situation.
