Tax Extensions... the Ultimate Snooze Button

March, 31 2015 by Jean Lee Scherkey, EA

After all, you never did get those W-2s, your mortgage interest statements, or that student loan paper showing the obnoxious amount of student loan interest you paid in 2014. Well, good news! The IRS has a snooze button they call an “Extension.” An extension allows taxpayers to gently glide into the world of taxes by providing more time to recuperate from the recent year gone by. As long as you pay what you owe and file the extension by April 15^th, you should escape the taxing boogie man and his late-filing penalty.

For federal purposes, extensions are filed on Form 4868.  An extension gives you until October 15th to file your return. Extensions can be e-filed free of charge at the TurboTax website. You can also download, print, fill-out and mail Form 4868 from the IRS website. The form is considered timely filed if postmarked by April 15th.

If you think you owe tax to the IRS, you should pay it by April 15^th to avoid a late payment penalty. Generally, extensions give taxpayers additional time to file, not to pay the taxes due. But what if you have no idea what you earned last year? What if your tax documents were misrouted to Antiqua and, instead of having them mailed back, you are saving to retrieve them personally? Thankfully, there are a couple of options available to help determine if you should send a little change the IRS’s way with your extension.

If you received a federal refund on your 2013 tax return and your total income, deductions and withholding remained relatively the same during 2014, chances are you may not owe taxes on your 2014 return. Keep in mind, however, that even an income increase of a few hundred dollars can tip the scales and cause a refund to turn into tax due. And, since life never stands still, you probably encountered a few changes last year that could affect your taxes as well.

This year, taxpayers who did not have medical insurance the entire year and did not qualify for any of the healthcare exemptions may owe additional tax in the form of a Shared Responsibility Payment. Thankfully, the late payment penalty does not apply to the penalty for not having minimum essential healthcare insurance. In other words, you will not have to pay a late payment penalty for not paying the health insurance penalty before April 15^th.

Online “Do It Yourself” tax software companies, such as TurboTax, offer free online tax calculators to help you estimate your possible refund or tax due. Generally, the last paystub received in 2014 will show your yearly wages and withholdings. Many employers provide employees online access to their paystubs. Investment companies, banks, universities, and even mortgage lenders offer customers online portals to access year-end financial data.

If you are unable to locate your paystubs and fourth quarter statements, the IRS website extended its online services to include access to Wage and Income Transcripts from all the income forms reported to the IRS.  Wage and Income Transcripts also list any mortgage interest, college tuition and other payments reported to the IRS.  Keep in mind that the 2014 Wage & Income Transcript reports may not be complete until July of 2015.

When roughing out your income and deductions for an extension, just remember that, like a good game of horseshoes or bocce ball, being close enough counts. Generally, as long as 90% of the total tax on your 2014 return is paid through withholdings, estimated tax payments or when you submit your extension, you will escape the late payment penalty. Don’t have enough to pay at least 90% of the expected tax due? It is better to go ahead and file the extension.  What you will save by skirting by the late-filing penalty can be added to the Taco Tuesday fund.

For your viewing pleasure, the IRS produced a YouTube video on extensions titled Need More Time to File Your Tax Return? So, if you’d like to learn even more about filing extensions, microwave that popcorn, put up your feet and enjoy the show.