The Pros and Cons of Filing for an Extension

Over 10 million people file extensions every year to secure more time to file their taxes – 6 months to be exact. Procrastinators and disorganized filers will surely rejoice, but is taking your sweet time to file always the smartest option? We unpack the pros and cons of filing for an extension below.

PROS of Filing for an Extension

More time to get it right

Possibly the worst thing you could do is rush filing your return and receive a request to fix errors. Maybe your tax documents arrived late, you need some extra time to comb through receipts, or you have a new set of financial circumstances that you’d like to talk through with your tax professional. Whatever the case may be, the extra six months could be necessary to file your return correctly and without the added stress of doing so in a hurry.

More time to weigh your options

This pro is similar to the above but more strategic: you may want the extra time to decide whether or not you carry back or forward business losses, whether to depreciate equipment, or a variety of other elections. Perhaps more time needs to pass before you can make the smartest decision, and in this case, filing an extension can be more lucrative.

Reduce late penalties

There are, unsurprisingly, penalties associated with filing a late return (that is, filing without an extension). They amount to a 5 percent per month penalty on any tax due plus a late penalty of half a percent per month. To make matters worse, if you happen to file for an extension, and still file late, your penalties will be deferred. Simply put, filing an extension is much better than filing any time after April 20th without an extension or after October 15th, period.

Self employed taxpayers can pay more towards retirement

If you’re self-employed, you may want to file one of the IRAs available to you (SEP-IRA, solo 401(k), or a SIMPLE-IRA). If you do so and file an extension, you’ll have an extra six months to fund it. The rules for when you open the IRAs varies for each, so be sure to look into it before you open one, file and extension and plan to fund it until October. Either way, you will be able to stash away extra cash you wouldnt have otherwise.

Recharacterize your IRA

If your IRA is funded by the April deadline and you file for an extension, you can change your IRA from a traditional to a Roth or vice versa up until October. This can be helpful if your financial circumstances have changed, or you find you’re ineligible for one or the other.

Save on tax preparation

Some tax preparers charge extra in the few weeks leading up to the tax deadline. Filing an extension can get you a ‘low season’ fee and save you a bit of extra money.

CONS of Filing for an Extension

An extension to file is not an extension to pay

Although you have some wiggle room to gather your documents and ponder your election options, you unfortunately do not have an extra six months to pay what you owe. Although an extension allows you to reduce penalties, but outstanding taxes owed will accrue a 0.5 percent per month fee, plus interest (3 percent annually). It’s important to consider this cost when deciding whether or not to file an extension.

You don’t have extra time to contribute to an IRA

Of course, you do have the leeway with IRAs as mentioned above, but contributions of Traditional and Roth still must be made by the set deadline.

You can’t switch your filing status as a married couple

If you typically file as married filing jointly, you can change filing to separately by April 18th, but you don’t have until October 15th to make the switch.

You may not be eligible

Taxpayers that have a current offer in compromise must file by the standard deadline as outlined in their terms. If not, offer in compromise taxpayers run the risk of having the agreement revoked and the original debt reinstated.

Bottom Line of Filing for an Extension

Always file, no matter what. When you do so can be flexible if you play it strategically. Only file for an extension if it will truly benefit your financial circumstances; as mentioned, taking the time to weigh your options can add up to savings and smarter investments. If you plan to file for an extension or need a second opinion on whether you should, reach out to your trusted tax professional to make a plan that suits your needs.