Tax extensions explained
As you begin working on your taxes, you may hear your friends or tax accountant mention “extending” your tax return. We wanted to help demystify the tax filing and extension process, including why you may consider extending your tax returns, what the process is to file an extension, and what else you may want to consider.
What is a Tax Extension?
Individual Tax Returns (IRS Form 1040) are generally due April 15 of the following year. For example, your 2023 Tax Return is due April 15, 2024. While W-2s and 1099s are required to be issued ahead of this date, other tax forms may not be issued by the original tax filing due date. Because of this, the IRS will allow taxpayers to extend the time to file (but not pay) their taxes.
Reasons why you might consider extending your tax returns:
- Required Documents Outstanding - As noted above, the main reason to extend is to wait for your tax documents to be released. Some common examples include 5498s for retirement contributions being issued in May, partnership K-1s being issued throughout the summer, or the expectation of a corrected 1099 being issued late March/early April.
- Convenience - Often, there is a tight turnaround between your tax documents being issued and your tax returns needing to be filed. If you have plans in March/April, or you’re wanting to discuss your returns with a tax professional, extending and completing shortly after the original deadline may be preferable.
- Retirement Extension - If you are eligible for a SEP IRA, extending your returns extends the time you have to make a contribution to your retirement account, and reduce your current tax bill.
- Gift Tax Requirement - If your individual return is nearly complete, but you have a gift tax filing requirement, extending your individual return is a great option to extend your gift tax return as well. The IRS is slowly updating their technology and policies, but still requires gift tax returns (and extensions) to be filed on paper and mailed. However, your individual tax extension automatically extends your gift tax return, which can make the whole process easier.
- Tax Professional Request - Often, tax professionals are working exceptionally long hours February through April of each year. They may ask you to extend your returns in order to spread out the workload of their “busy season”.
How Do I Extend My Tax Return?
There are a few methods to extend your tax return:
- Extension Payment - The easiest method to extend your tax return is to make an extension payment online via IRS Direct Pay. Since a tax extension does not extend your time to pay your taxes, you should ensure that you calculate your estimated tax due and make an extension payment, if required. This payment suffices for your federal tax return extension as well. Tax Pro Note - If you had any non-withheld Q1 income in the current year, we recommend adding that payment to your prior year tax extension. This ensures you have a buffer to cover any unexpected income (such as a surprise K-1), and if not you can apply your prior tax return overpayment to your current year tax estimates when you complete your filing.
- Form 4868 - If you don’t believe you have taxes due but still want to extend your returns, you can file Form 4868 to extend your returns. A tax professional can generally do this quickly, or you can use software such as TurboTax to process a Form 4868. Of course, you can always mail a Form 4868 to the IRS if you’d prefer, but we generally recommend completing your filings electronically for instantaneous record.
- Foreign Exception - An overseas taxpayer receives an automatic 2-month extension to the original due date to complete their tax returns. These taxpayers can still file an extension, and receive an additional 6 months, if they would like to.
- Disaster Relief - Sometimes, a disaster affecting a large group may move a tax filing deadline. Recent examples were: COVID-19 moving the entire US tax filing deadline to July 15 (2019 returns) and May 15 (2020 returns) and that 2023 California Floods were determined a national disaster, and several counties were provided relief that moved their 2022 tax filing deadline from April 18, 2023 to May 15, 2023.
Why Shouldn’t I Extend My Tax Returns?
As long as you ensure you’ve paid enough tax, there are generally very few downsides to extending your returns. These may be a few exceptions as to why you’d want to accelerate your returns:
- Refund Expected - If you had all your income withheld on, you may be expecting a tax refund for the year. Generally, if you expect a refund, your tax preparer should be able to accelerate your return per your request.
- Securing a loan - If your most recent tax year has significantly higher income than prior years, you may be seeking to file your returns to provide a copy to a bank in order to secure funding of a loan. While it is possible to accelerate returns in this scenario, many banks will accept a Form 4868 showing your estimated tax as proof of your higher tax year while your returns are being processed.
What Additional Considerations Are There?
- State Extensions - Some states, such as California, are automatically extended with a federal extension. Other states like New York require a separate extension be filed with the state.
- Single-Member LLCs (SMLLC) - A SMLLC is disregarded for federal purposes, but states may have various filing requirements. Some states like California automatically extend the California SMLLC return, whereas others like New York have an earlier deadline for SMLLCs (3/15 for New York) with no extension available.
- Complex Entities - Entities that are not disregarded by the IRS (Partnerships, S-corporations, taxable trusts) all have separate rules for tax filing deadlines and extensions. If you have one of these entities, we recommend consulting with a tax advisor to ensure those deadlines are met.