As you read this column you have less than two weeks to file your 2018 tax return. Completing tax returns is always stressful, particularly, if you complete them yourself. Therefore, my advice is as opposed to stressing yourself out, if you haven’t completed your tax return or you haven’t even accumulated your information yet, you may want to consider filing an extension.
The IRS actually makes it easy to file an extension. All you need to do is complete Form 4868 and you will receive an automatic six-month extension to complete your return. However, there is one caveat that is important. The six-month automatic extension you receive is an extension to file your return, not to pay your taxes. Your taxes are still due by the April 15th deadline. Therefore, if you are going to file an extension it is important that you guesstimate where you stand with taxes, and if it appears you are going to owe money to the IRS that you pay those taxes, either online at www.irs.gov/payments or with a paper Form 4868. If you don’t make that payment, and it turns out when you complete your return later that you owe taxes, the IRS will charge you interest and potentially assess you a penalty. Therefore, to avoid interest and penalties it is important to guesstimate your tax liability.
For some reason there is a belief that if you file for an extension it will increase your audit risk; that is not the case. The mere fact that you file an extension, will have no bearing whether you are audited or not. What increases you audit risk is when you file sloppy, incomplete or inaccurate returns. That is why I always tell people if you don’t have the time to complete your return correctly, file for an extension. One thing to keep in mind is that even though you have until October 15 to complete the return after you file for an extension, that doesn’t mean you have to wait that long. Particularly if you’re someone who is going to get a refund, it does pay to complete your return as soon as possible so you can get your refund. However, once again, you shouldn’t rush, which will result in mistakes, which will increase your audit risk.
One thing not to forget about is the State of Michigan. The State of Michigan will automatically grant you an extension if you have a valid federal extension. Therefore, if you file for a federal extension, the State of Michigan will recognize that and automatically extend the time you have to file your return until October 15. However, the Michigan tax extension is only extra time to file your return, not to pay your taxes. If you find you are going to owe money to the State of Michigan you can make an extension payment with the State of Michigan Extension Form. Once again, that form only has to be filed if you are going to owe money. If you do not owe additional taxes to the State of Michigan, or you are going to get a state tax refund, you don’t need to file the State of Michigan extension form.
Completing tax returns are not fun. However, what makes them easier is if you have all the information. Therefore, as you complete your 2018 tax return, it’s not a bad idea to start a file for 2019.
Good luck!
Rick is a fee-only financial advisor. If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.