Instead of scrambling to get your business and individual tax returns prepared by the tax deadline, filing for an extension may be your best strategy. The extra time will allow you to avoid costly mistakes and provides you with the opportunity to engage a financial professional to review your returns to ensure you aren’t missing any tax breaks you may not realize you’re eligible for, which we always recommend. An extension is very simple to file and will automatically qualify for a six-month extension from the IRS and gives you until October 15, 2018, to file your 2017 individual return, but it must be filed by April 17th.
The deadline for filing your 2017 individual income tax return this year is Tuesday, April 17, 2018 so if your returns aren’t filed yet, it’s possible that you, or your CPA, will be filing for an extension.
An extension allows you to avoid late filing penalties. The IRS can impose a late filing penalty of 5% per month (up to a maximum of 25%) on any tax due if you fail to file or extend your return; and a late payment penalty of .5% per month if you don’t pay the proper tax balance.
But an extension to file is not an extension to pay your tax bill. By April 17, you must make a good-faith estimate of your 2017 tax liability. In general, to avoid penalties, you also must have paid in at least 90% of the current year's tax liability or 100% of the prior year's liability by April 17. The latter threshold increases to 110% of the prior year's (2016 in this case) liability if your adjusted gross income (AGI) for 2017 was over $150,000.
Extending your tax returns might be a good decision if:
You Run Out of Time
For many people, the first quarter of the year is their busiest time at work. If you’re overloaded or travel frequently, you might just run out of time. Even using a CPA might not help if you deliver your information at the last minute. Most CPA’s requires all personal information at least a month in advance, assuming any business accounting has already been completed.
Your CPA Is Too Busy
Tax professionals are under the gun every year to make the deadline for corporate and partnership tax returns, which is March 15, and typically all tax professionals prioritize business returns, which doesn’t typically doesn’t allow enough time to get individual tax returns submitted within the following four weeks.
More importantly, the TCJA (Tax Cuts & Jobs Act of 2017), along with the late modifications to the tax code with respect to the ‘tax extenders’ not only delayed the availability of tax forms by the IRS and all software vendors, but required many to amend their returns early in the season.
You Might Save Money
Sometimes filing an extension is part of a bigger plan to save money or cut your taxes. For example, if you use a tax professional and are missing key information, filing an extension is less expensive than filing an incomplete return and then filing an amended return.
Also, giving your CPA (or yourself) more time makes it more likely that he or she can find available tax benefits and reduce what you owe. Being rushed isn’t an excuse for making errors but could certainly result in missed savings.
You’re Missing Information
If you have a fairly complicated tax situation, you may wait on multiple documents every year, including Form 1099s and Schedule K-1s. Many arrive too late to complete my return by the April deadline.
If you don’t have all the necessary paperwork, or if any information you have is incorrect, it’s better to file an extension than to submit an incorrect return and amend it later. However, if you do catch an error, it’s worth noting that you have up to three years (including extensions) after the date you filed your original return to correct it using Form 1040X.
You’re Dealing With a Major Life Event
Every year brings different challenges. If you’re dealing with a major event, such as relocating, getting married or divorced, an illness or the loss of a loved one, you may not have the mental bandwidth to meet the regular tax deadline.
Medical Expense Deductions
Most TCJA changes don't go into effect until 2018. But the liberalization for itemized medical expense deductions goes into effect retroactively for 2017. Many people are unaware of this change and could use more time to compile their medical records. If you incurred major medical expenses in 2017, you might benefit from an extension if you need more time to compile all your medical expenses.
Under prior law, if you itemized deductions in 2017, you could deduct unreimbursed medical expenses in excess of 10% of adjusted gross income (AGI). The new tax law lowers the deduction threshold to 7.5% of AGI — but only for 2017 and 2018. This change might open the door for an additional or increased deduction on your 2017 return. It also might affect your decision to itemize deductions or take the standard deduction for 2017.
Funding a Retirement Plan
Extensions will also buy you extra time to fund a retirement plan if you are self-employed or have a side gig outside of your day job. If you don’t have a retirement plan, you may be able to establish a Simplified Employee Pension (SEP) and contribute before the extended due date of your return (October 15th 2018) and still take the tax deduction on your 2017 return.
Speaking of retirement planning, keep in mind that you must make your 2017 IRA contributions by April 17th, even if you do extend your return.
Generally speaking, if you are eligible, the IRS allows you to make an IRA contribution for a particular tax year up until the original tax deadline of the following year (without extensions). This rule applies to both traditional IRAs and Roth IRAs.
You may convert a traditional IRA into a Roth IRA to benefit from future tax-free payouts. Qualified distributions from a Roth IRA (for example, those made after age 59½ if you've had at least one Roth account open for over five years) are 100% exempt from federal income tax. By comparison, qualified distributions from a traditional IRA are wholly or partially taxable.
A Roth conversion is subject to tax in the year of conversion based on the account balance on the conversion date. You may later second-guess an IRA conversion if, say, the Roth IRA's investments decreased in value after the conversion date or you need the money you set aside for the conversion tax for another purpose.
Fortunately, you can still undo a 2017 conversion. You just need to "recharacterize" the Roth IRA back into a traditional IRA by the 2017 tax return due date, including extensions, for the year of the conversion.
Although you don't need to extend your 2017 return to recharacterize a Roth conversion, an extension gives you a little extra time to evaluate your options.
Important: Starting in 2018, the TCJA repeals the Roth recharacterization privilege. But the IRS has confirmed that you can still recharacterize a 2017 conversion, so long as you get it done by October 15, 2018.
Business Auto Expenses
If you use a vehicle for your self-employed business, you can deduct either actual expenses (including depreciation expense) related to your business use, or a simplified flat mileage rate prescribed by the IRS. For 2017, the flat rate is 53.5 cents for each mile of business travel, plus the actual cost of any tolls and parking fees. (For 2018, the rate increases to 54.5 cents for each mile of business travel.)
Using the flat rate is certainly easier. But, if you take the time to examine your records, you might determine that using the actual expense method produces a significantly bigger deduction. An extension gives you extra time to compile the detailed records needed to support the actual expense method.
Important: You can generally switch to the actual expense method if you've used the flat rate to deduct business auto expenses in a prior year. But, if you've previously claimed a deduction for accelerated depreciation on the vehicle, you generally can't switch to using the flat rate on that vehicle in subsequent tax year.
In addition to these examples, your CPA might have other last-minute ideas that apply to your personal situation. Contact him or her to discuss this decision. As always, please call our office with any questions you may have regarding this, or any other topics or concerns.
Time is running out on filing your 2017 tax return and an extension stops the clock and gives you extra time to plan out your final tax strategy.
While we are, of course, available to provide you with any business, accounting or tax services, the information contained herein is general in nature; any advice regarding those services should not be construed as tax advice and is not intended as a thorough, in-depth analysis of specific issues, a substitute for a legal, accounting or tax advice or opinion, nor is it sufficient to avoid tax-related penalties to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact Strive Tax & Accounting, LLC or other tax professional prior to taking any action based upon this information. Strive Tax & Accounting, LLC assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.