An extension is your way of asking the Internal Revenue Service for additional time to file your tax return. The IRS will automatically grant you an additional six months to file your return. An extension basically extends the filing deadline for personal tax returns from April 18th to October 17th.
Businesses can also request an extension, which pushes their deadline to September 15th.
Note well: while an extension gives you extra time to file your return, an extension does not give you extra time to pay your tax.
Payments are still due by April 18, 2016, for the year 2015. But an extension can help reduce your penalties if you cannot afford to pay in full by the deadline.
Key Benefits of Filing an Extension
Six Extra Months to Finish up Your Tax Return.
Having extra time to finish your return is often necessary, especially if you are still waiting for tax documents to arrive in the mail or you need additional time to organize your tax deductions.
Helps Reduce Late Penalties
There are two basic penalties the IRS typically imposes: 1) a late filing penalty of 5% per month on any tax due and 2) a late payment penalty of half a percent per month. If you file an extension and then file by the extended deadline of October 17th, you’ll avoid the 5% per month late filing penalty. If you file after October 17th, the late filing penalty will begin from October 17th, which creates a deferral on this penalty.
Can Preserve Your Tax Refunds If You File After the Extended Deadline
Some people end up filing several years late, and there’s a three-year deadline for receiving a refund check from the IRS. This three-year statute of limitations begins on the original filing deadline (April 18, 2016, for the year 2015). But with an extension, the refund statute of limitations is also extended by six months, which can preserve the ability of taxpayers to receive their federal tax refund even if they get behind in submitting their tax return.
Provides Extra Time For Self-Employed Persons To Fund A Retirement Plan.
Self-employed persons may want to fund a SEP-IRA, solo 401(k) or SIMPLE-IRA plan for themselves. Filing an extension provides these taxpayers with an extra six months to fund their retirement plan. Note: solo 401(k) and SIMPLE plans need to be set up during the tax year, but actually funding the plan can occur as late as the extended deadline for the previous tax year. With a SEP-IRA, however, entrepreneurs can open and fund a SEP-IRA for the previous year by the extended deadline as long as they filed an extension.
Additional Time to Recharacterize an IRA Contribution
As long as your IRA is funded by the April deadline, you can change the nature of the IRA by the October extended deadline. Essentially, you can turn your traditional IRA contribution into a Roth IRA, or a Roth IRA contribution into a traditional IRA contribution. This is helpful if you’re not sure if you are eligible for one type of IRA. You can even use this provision to recharacterize a Roth conversion back to a traditional IRA.
Provides Additional Time To Make Various Elections On Your Tax Return.
There are a wide variety of decisions that can be made on the tax return, such as deciding whether to depreciate equipment or take a Section 179 deduction, and whether to carryback or forward any business losses. Those decisions must be made when the tax return is filed. Filing an extension gives you extra time to make those decisions.
Filing An Extension Can Improve The Accuracy Of Your Return
There’s an inevitable rush to get tax returns finished by the deadline, and taxpayers and accountants alike can make mistakes when rushing. With an extension, this gives you and your accountant extra time to go over the return and make sure everything is complete before sending in the return.