DirectoryGold Article Directory
Search:

Home | Finance | Taxes


A CPA Explains Why Tax Return Extensions Often Don't Make Sense

By: Stephen Nelson

If you file a tax return extension to move the due date for your tax return to October 15th, you've got lots of company. Aboute forty percent of the populations extends by using the simple 4868 form available from the www.irs.gov web site.

But while extending is very easy, good arguments can be made for not extending.

Reason #1: No Delay in Cash Outflow

You can't delay the payment of any tax you owe--only the filing of the actual return. And this rule means that, technically speaking, when you file your extension, you're supposed to pay any tax you owe.

Of course, paying the tax you owe means you need to do (or should do) most of the work required to file anyway.

And all this makes you wonder what extending really gets you. You're supposed to pay the tax on time anyway. And, shoot, you go to much of the preparation work anyway. Why not go to just a bit more work and file on time?

Reason #2: Lost IRA Deductions

Another reason not to extend concerns taking regular and Roth IRA deductions.

Lots of taxpayers like to decide at the very last minute, right before they file their return, whether or not to make an IRA contribution for the year the tax return is being filed for. And that makes sense. By looking at the tax return, you'll often know how much an IRA saves you in tax or whether an IRA provides a nice boost to your refund.

Oftentimes, people need to wait until filing to contribute to an IRA because they may not know if they're eligible until they tally their income.

But extending creates a problem here. IRA contributions need to be made by the original due date of the return, or April 15. As a result, taxpayers who extend their return to October 15 often lose the opportunity to make a last-minute IRA contribution.

Reason #3: Late Input to Current Year Quarterlies

Extending a tax return deadline and then filing late creates another headache for taxpayers (like business owners and investors) who need to prepare estimates of their tax liability and then make quarterly payments.

Here's why: You can use information from the previous year's return to make quarterly payments for the current year. In most cases, for example, you can make quarterly payments equal to one-fourth of the previous year's tax liability. If you owed $20,000 in year 1, making $5,000 a quarter payments in year 2 will typically mean you avoid penalties for underpayment.

If you don't know your year 1 tax liability until close to October 15, however, you can't use that information to make your first three year 2 quarterly payments (due on April 15, June 15, and September 15).

And another point needs to be made about using the previous year's tax return information to help set the quarterly tax payment amount. If for the previous year you're going to get a refund, you can use that refund to reduce your quarterly payment for the current year.

For example, if you will owe $20,000 for the current year, but are entitled to a $5,000 refund for the previous year, you can use that refund to make your first quarter payment. Or at least you can if you file on time.

Note: If your income is high, you may be required to make quarterly payments equal to 110% of the previous year's tax liability in order to avoid underpayment penalties. Consult your tax advisor for more information.

Reason #4: Delayed Refunds

While we're on the subject of refunds, let me a quick observation. In many cases, extenders receive refunds.

That means that by filing late, a taxpayer delays their tax refund. And no way does that make economic sense. Why loan the government your money interest-free?

Reason #5: Greater Chance of Error

One final, big reason exists for not extending a return and then filing late if you use a tax return preparer.

If you force your preparer to do your return very late in the extension season--say in September or, heaven forbid, October--you greatly increase the chances your return will contain a preparation error. And, sadly, you are almost assured of suffering from poorer client service.

At the end of the extension season, your accountant will be feverishly preparing returns for clients who haven't been able to get themselves organized earlier. Automatically, that last-minute rush means the taxpayer supplies in incomplete information, that the return preparer and taxpayer communicate more poorly, and that deductions get missed.

Article Source: http://articles.directorygold.com

Seattle tax CPA Stephen L. Nelson is the best-selling author of QuickBooks for Dummies and the editor of the popular do-it-yourself business incorporation kits web site.

Please Rate this Article

 

Not yet Rated

Click the XML Icon Above to Receive Taxes Articles Via RSS!
Additional Articles From - Home | Finance | Taxes
Sign Up for a free account or learn more.

Submit Articles
Member Login
Top Authors
Most Popular Articles
Submission Guidelines
Ezine Notifications
Article RSS Feeds
New Stuff
About Us
Site Blog
Forum
Link to Us
Contact Us
Privacy Policy
Terms of Service
DirectoryGold Home
Free Image Hosting
MySpace Tweaks
 Subscribe in a reader






.

Powered by Article Dashboard