The Best Time to Start a Financial Plan is Now
by Tricia Bush, CPA, CFP®, Partner, Bestgate Advisors
Tax Time
Should You File an Extension?
April is here, and if you haven’t yet filed your 2024 income tax return, time is running out. With the April 15 deadline approaching, you need to decide whether to file your return now or submit an extension request. But is filing an extension a good idea? And if you do extend, how much should you pay to avoid penalties?
When to File an Extension
Filing an extension gives you an additional six months—until October 15—to submit your return. This extra time can be beneficial in several situations:
You’re Missing Information. If you are waiting on corrected tax documents or additional income statements, it’s better to extend rather than file an inaccurate return.
Your Return is Complex. If you have business income, rental properties, or other intricate tax matters, an extension allows for a thorough review and maximization of deductions and credits.
You Want a CPA’s Help. Many CPAs are swamped leading up to April 15. If you’re looking for professional tax assistance, waiting until after the deadline might make it easier to find the right advisor.
Take Joe, for example. He’s a self-employed consultant who receives multiple 1099s from different clients. One of his clients accidentally sent him a form with incorrect income reported. Rather than rushing to file and then having to amend his return later, Joe filed an extension to give himself time to ensure his return was accurate. By waiting, he avoided unnecessary stress and potential IRS issues down the road.
Now consider Lisa. She inherited money from her aunt last year and isn’t sure whether she has all the tax documents she needs. Between potential 1099s for interest, dividends, or capital gains, she feels overwhelmed and doesn’t want to risk missing anything. By filing an extension, she gives herself extra time to track down all necessary forms, consult a tax professional, and file a complete return without stress.
Despite the benefits, an extension isn’t always the best move. If you are due a large refund, you may want to file sooner, so you can put that money to work rather than letting the IRS hold onto it. Or if you’re trying to get a loan on a new house. The banks seem to prefer a completed tax return for records vs. just an extension. Additionally, if you already have all your tax documents and your return is straightforward, there’s little reason to delay.
The Stigma Around Filing an Extension
You’ve probably heard someone say, “Filing an extension is like waving a red flag at the IRS!” But that’s simply not true. Extensions are routine and commonly used by taxpayers for various reasons. The IRS does not penalize you just for filing an extension. However, what they do penalize is failing to pay your estimated tax due by April 15.
Paying Taxes with Your Extension
A tax extension gives you more time to file, but it does not give you more time to pay. If you expect to owe taxes, you must make a payment with your extension to avoid penalties and interest.
When estimating how much to pay, it’s best to err on the side of caution. If you underpay, you’ll be hit with interest and penalties on the unpaid balance. Maryland follows similar rules, so be sure to extend your state return as well, if needed.
If you are a taxpayer who makes estimated tax payments, consider including your Q1 2025 estimated tax payment with your extension payment. This strategy helps cover any possible shortfall from 2024 and ensures you stay on track for the new tax year. By overpaying slightly, you can also reduce the risk of underpayment penalties in 2025.
Avoiding IRS Penalties
Failing to pay your tax liability by April 15 can be costly.
Here’s what you should know:
Failure to Pay Penalty – 0.5 percent of your unpaid taxes per month, up to 25 percent of the total due.
Failure to File Penalty – 5 percent per month (or part of a month) of the unpaid balance, up to 25 percent. If you don’t file an extension and file late, you could face this much harsher penalty.
Interest Charges – The IRS charges interest on unpaid taxes, currently at an annual rate of 8 percent, compounding daily.
Final Thoughts
Filing an extension can be a smart move, but only if you cover your estimated tax due. If you’re expecting a refund and have all your information, go ahead and file now. Otherwise, don’t stress—there’s nothing wrong with filing an extension if it allows you to file a complete and accurate return.
Whatever you decide, make sure to include your state return in your plans and consider making your first estimated tax payment at the same time.
If you need a tax professional’s help, waiting until after April 15 might make it easier to find the right CPA.
Need more time? File an extension, pay what you owe, and rest easy knowing you’ve made a responsible tax decision.
Disclosure: This article is intended for informational purposes only and does not constitute financial advice. Always consult with a qualified financial advisor or planner before making any financial decisions.
