This is a guest post by JoeTaxpayer. With the tax deadline quickly approaching, I asked Joe to share the steps and reasoning that one would need to file a tax extension.  As a reminder, here’s what happens when you file your tax return late or not at all or what you need to know about filing an amended return.

How To File a Tax Extension

How To File a Tax Extension

You’ve just been busy, I know, me too.

Your hard drive crashed and you need to gather up your notes and all your stock transactions. Your aunt in New Jersey passed away, and suddenly April 14th is here, now that you’ve returned from the funeral.

I don’t care what your reason is for needing to file late (although I am sorry if you lost a relative or loved one) and truth be told, neither does the IRS.

They do, however care about two things, first that you tell them via Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return) and that you pay most of your tax liability for the year. In this case, most means that if you owe the greater of 10% of your final tax liability or $1000 you will be hit with a penalty in addition to interest on the amount owed. So long as you’ve paid this amount, you will only be charged interest.

The interest rate is currently 4% and you can always find the current rate by gong to News Releases and Fact Sheets and looking for the news release with Interest Rates in the title. If you owe an amount small enough to carry no penalty, this is a pretty reasonable rate, certainly better than charging the fee to your credit card.

Filing a Tax Extension Gives You Time

Keep in mind, the extension also gives you the extra six months to recharacterize money you converted from a Traditional IRA to a Roth. By changing some of it back, you might reduce your tax liability just enough to avoid the penalty. A bit of tinkering with your tax software, but worth the effort to save those dollars.

On this note, there is a Roth trick that savvy planners have been using to maximize their clients’ wealth. Say you wish to convert $5000 to a Roth account. Right now, chose two funds or stocks worth $5000 and convert to two separate Roth accounts. In October of ’11 when your 2010 tax return is due, recharacterize the account that’s lower in value. This strategy can be done with any number of accounts, so long as you remember to recharacterize, or you’ll get a hefty unwanted tax bill.

If you simply don’t file your tax return, you can be penalized 5% of the amount owed up to 25% maximum. Ouch.

Tax Extensions for Business Owners

For a self-employed individual, there is an added benefit to requesting an extension – retirement accounts can be funded right up until the due date of the return, including the extension. This gives you until the Oct 15th date to raise the money to put into the plan. For those whose business is cyclic or simply going through a down year, this extra time is a perk to be aware of.

Editor’s Note: Ever sine I’ve became self-employed, we have always filed a tax extension.   It has helped my wife and I out by getting a clearer picture of where we are with the business and more time to figure out how much we want to contribute to our SEP IRA.

After reading this brief article, I hope that none of Jeff’s readers will find themselves in this situation. File that tax extension request and buy yourself until October 15th to get your act together and put 2011 into the record books.

As always your comments here are most appreciated, and if you have any questions, just ask.

This is a guest post by JoeTaxpayer.The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute specific individualized tax, legal or investment advice. We suggest that you discuss your specific tax issues with a qualified tax or legal advisor.


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Comments | 2 Responses

  1. mike blick says

    If you are opening a SEP account for 2012 does that have to opened during 2011 or can it be done before April 15th 2012 for 2011 tax return??

    • Jeff Rose says

      If you are trying to open a SEP IRA to make 2011 contributions, you have until April 17th to do so unless……you file an extension. In that case you have until Oct 15th. I’ve done this for the past couple of years with my own business. Here’s some more info about the rules on opening a SEP IRA.

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