With about two weeks to go to file your taxes, many tax-paying procrastinators are starting to get nervous about whether they'll be able to get their returns done by deadline time. Getting a six-month extension to file is easy to do and gives you some clear advantages if you're feeling crunched on time. But there are also some downsides to getting a tax extension. Let's take a look at the pros and cons of getting an extension from the IRS.
The Pros of Getting an Extension
1. It's easy and free.
All you have to do to get six extra months to file your taxes is to file a single form with the IRS. By completing IRS Form 4868, you'll automatically get until Oct. 15 to get your returns filed. There's no fee for the extension.
2. You'll avoid a late-filing penalty.
Ordinarily, if you don't file your return by April 15, you'll pay a penalty of 5 percent of the tax you owe for every month that you're late, with a maximum total penalty of 25 percent. Moreover, if your return is more than 60 days late, then the minimum penalty is either $135 or the balance of taxes you owe, whatever is smaller. If you file for an extension, however, you don't get charged a late filing penalty as long as you file by October.
3. Your accountant might actually have time for you.
Trying to get professional help during April is always a challenge as CPAs and other tax pros scurry to get all their clients' returns in. By extending, you can walk into your accountant's office in May and have a much better chance of getting an appointment.
4. An extension isn't an automatic audit red-flag.
Many taxpayers are afraid that by getting an extension, they're inviting scrutiny by the IRS. But most of the time, an extension reduces your audit risk because you're less likely to make the dumb mistakes that last-minute filers typically make.
5. You'll get more time to reverse a Roth conversion and take advantage of other obscure rules.
One quirk of the tax laws is that if you converted a regular retirement account to a Roth IRA during 2013, you can undo that conversion at any time before your 2013 return is due. By filing for an extension, you get another six months before you have to decide. Undoing a Roth conversion can save you taxes if the value of your investments has fallen since the conversion, and with the market at all-time highs, many fear a potential downturn could be coming soon.
In addition, there are other less commonly used rules, such as funding a self-employed retirement plan, that are tied to an extended filing deadline. Getting an extension gives you more time to get those tasks done as well.
The Cons of Getting an Extension
1. You have to wait longer for your refund.
If you're due a refund from the IRS, you can't claim it until you file your tax return. So even though extending gives you more time to file, it also lengthens the potential wait for your eventual refund check.
2. You'll still pay late-payment penalties and interest if you don't pay your tax now.
Even if you get an extension, you still have to pay the tax you owe by April 15. If you don't, you'll have to pay interest on the unpaid amount plus an extra 0.5 percent in penalties for every month that you're late. Those penalties are far less than the late-filing penalty, but they're big enough that it still makes sense to come up with a reasonable estimate of how much tax you'll owe and pay it when you file your extension.
3. It won't be any easier six months from now.
If you're prone to procrastination, the temptation after you file for an extension is simply to squander the next five months until the October deadline starts approaching. So if you need the push of having a deadline in order to get your taxes done, you'll probably be better off just biting the bullet and getting your returns filed now.
Get 'em done!
If you can't get your taxes done in the next week, then filing for an extension is likely your best move. But even if you do get an extension, don't wait until October to file. Get them done as soon as you can, and you'll be able to stop worrying about the IRS watching over your shoulder.
Crazy tax deductions
The Pros and Cons of Getting a Tax Extension
Who knew sweating profusely could get you out of paying taxes?
Tom Walpole, a CPA from Rochester, N.Y., had a client who successfully wrote off the more than $10,000 he paid for central air conditioning in his home and cottage.
He claimed they were medical expenses, since he had a condition involving excessive sweating that made it necessary for him to have air conditioning.
He attached a doctor's prescription to his tax return stating that the loss of fluids from sweating could potentially pose a health threat, and the IRS let it through.
Even nose jobs can be deductible -- as long as you need your nose for work.
A wine store and wine bar owner from California was able to successfully write off his nose job as a business expense last year because he was having problems smelling.
He claimed the surgery was medically necessary for his job, given the several buying trips he took to Europe each year where he needed to be able to smell properly to pick out the best wines.
His tax preparer, enrolled agent Bonnie Lee, deemed it a necessary business expense but told him to get a note from his doctor detailing the smelling condition and prescribing the nose job in case the IRS decided to sniff around.
Because she chose to work at a private Catholic school rather than a public school, a teacher from New York figured she could write off the nearly $20,000 difference in salary as a charitable contribution.
It made sense to her, since she was willing to work for less money in order to help her church.
But her tax preparer, Jeff Gentner, an enrolled agent from Williamsville, N.Y, had to be the bearer of bad news.
"I told her it's redemption versus reduction -- the heavenly rewards will be there, but I can't do anything about the refund," he said.
Just because it's a little racy doesn't mean it can't be considered a valid deduction.
Vincent Porter, a CPA from Arlington, Texas, found that out this year when a client wanted to write off $200 worth of sex toys.
The client, an exotic dancer, was able to deduct the cost of a few vibrators, lubricant and lingerie as business expenses because she used them for her webcam work.
"If a roofer can deduct the cost of his tools used in his line of work, then an 'actress' may deduct her 'tools' used to generate revenue as well," Porter said. "As long as she was not doing anything illegal, then we could support the deduction."
No one wants your used underwear and socks, and the IRS sure doesn't want to see a charitable deduction for them either.
On several occasions, clients have submitted long lists of charitable donations, including many pairs of used underwear and socks they had given to organizations like Goodwill, said Bernadette Schopfer, director of taxation at Maier Markey & Justic LLP.
And if they try to value the underwear and socks at a couple dollars a pair, that can really add up.
"Things are always worth more to the person donating," said Schopfer. "Sometimes you have to step back and say, 'Is somebody really going to use this?' And chances are, they don't want your old underwear."
After a long night of drinking with clients, a business owner got thrown in jail for getting tangled up in a bar fight.
He subsequently attempted to deduct all the drink and dinner expenses from the night -- along with the bail he paid to get out of jail and the cab fare to get back to work the next day.
He was ultimately able to deduct the meal and drink expenses -- and even the taxi fare, because they were work-related. But the more than $10,000 in bail money was a no-go, said Dominique Molina, president of the American Institute of Certified Tax Coaches.
So, you decided to become your own boss (at least part-time) and start driving for a ride-sharing company like Lyft. Use the Lyft tax preparation checklist below to organize your income and deductions to make filing your taxes a breeze. Remember, not all items listed will apply to you, but it will give you a good idea on what you need to report as income and what you can claim as a deduction.
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