Understanding Tax Extensions: A Guide for Individual Filers

For Maine residents, the filing due date for TY2023 is April 17th, 2024.  An automatic extension applies for residents affected by the storms and flooding that began on December 17, 2023.  This applies only to resident of the following counties:  Androscoggin, Franklin, Hancock, Kennebec, Oxford, Penobscot, Piscataquis, Somerset, Waldo, and Washington.

Filing for a tax extension is a common strategy for individuals who need more time to prepare their tax returns. However, there’s a critical aspect of tax extensions that often gets overlooked: an extension to file is not an extension to pay. This distinction is crucial for avoiding penalties and interest on taxes owed. Let’s dive into what you need to know about tax extensions.

What Does a Tax Extension Entail?

A tax extension grants individual taxpayers extra time to file their tax returns, extending the deadline from April 15 to October 15. However, it’s a widespread misconception that this extension also delays the payment deadline for taxes owed, which it does not.

Clarifying the Extension Misconception

The idea that an extension provides extra time to pay taxes can lead to unwelcome surprises, such as penalties and interest on the owed amount. To avoid these costs, it’s important to differentiate between filing your return and paying your tax liability. The extension applies only to the filing of your return.

Paying Taxes on Time

Even if you file for an extension, the IRS requires you to estimate and pay any taxes you owe by the original April 15 deadline. If you don’t, penalties and interest will start accruing on the unpaid amount.

For instance, consider Jane, who estimates she owes $3,000 in taxes. She files for an extension because she needs more time to gather her documents but forgets to pay the estimated amount by April 15. When Jane finally pays her taxes with her return in October, she discovers she owes additional penalties and interest on the $3,000 that was due in April.

How to Use Extensions Wisely

To make the most of a tax extension and avoid extra charges, estimate your tax liability and make a payment by the April deadline. If you overpay, you’ll get a refund once you file your return. If you underpay, you’ll owe the balance, but penalties and interest will accrue only on the amount unpaid after April 15.

Let’s say John thinks he owes $2,500 in taxes and files for an extension. He pays $2,500 by April 15. When he files his return in October, he learns he actually owed $2,800. John will owe the additional $300, plus any penalties and interest on that $300 from April 15 to the payment date. However, if John had paid nothing by April 15, he would face penalties and interest on the entire $2,800.

Avoiding Penalties and Interest

The simplest way to avoid penalties and interest while taking advantage of a tax extension is to accurately estimate and pay your tax liability by the original deadline. This proactive approach ensures you only face additional charges on any underpaid amount, rather than the entire tax bill.

Conclusion

Tax extensions can provide valuable extra time for filing your return, but they do not grant additional time to pay taxes owed. By understanding the distinction and taking steps to estimate and pay your taxes by the April deadline, you can use extensions effectively without incurring unnecessary penalties and interest. Consulting a tax professional can also help navigate your tax situation, ensuring you make informed decisions and remain compliant with IRS regulations. Remember, a well-informed taxpayer can avoid the pitfalls of the tax season and maintain financial health.

For Maine residents, the filing due date for TY2023 is April 17th, 2024.  An automatic extension applies for residents affected by the storms and flooding that began on December 17, 2023.  This applies only to resident of the following counties:  Androscoggin, Franklin, Hancock, Kennebec, Oxford, Penobscot, Piscataquis, Somerset, Waldo, and Washington.

For more information or to sign up to work with us, please visit www.heritagetaxcompany.com.