Pros and Cons of Getting a Tax Extension

Your federal income tax return is due today. However, if that deadline doesn't suit you for whatever reason, it's pretty easy to get the due date extended to October 15. All you have to do is file a simple IRS form or pay your taxes electronically (see Tax Extension: How to Get More Time to File Your Tax Return for details). Make sure you act before midnight on July 15, though.

• 12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)

Since the process is relatively simple and straightforward, should you get a tax extension? Well, it depends. There are advantages and disadvantages to pushing back your tax filing deadline. So, it really comes down to your own situation. What makes sense for you? To help you answer that question, here are a few pros and cons of waiting to file your tax return.

Pro: You Get More Time to File

If you just can't file your return by the July 15 deadline, then by all means get an extension. You're sick, you can't find your tax records, your computer crashed. . .whatever the reason, if you can't file you can't file. Don't bang your head against the wall trying to come up with a way to get your return in before the stroke of midnight. Take the extension.

• 7 Reasons to File a Tax Return Even If You Don't Have To (Hint: They're Due July 15!)

More time can also mean a more accurate tax return. For example, you (or your tax preparer) will have more time to determine which tax breaks apply to you and which ones don't. Haste makes waste. So, if you're not sure about how to handle something on your tax return, don't rush it – taking the extension will buy you more time to figure it out.

Con: You Have More Time to Worry About Taxes

Nobody really likes to think about taxes. . .so why not just get it over with so you can forget about taxes until next year. Pushing your tax return off until October means you'll just have three more months to worry about it. If you don't need more time, don't take it.

• Tax Changes and Key Amounts for the 2020 Tax Year

Plus, the task of filing your return won't be any easier in October. You'll still have to collect all your tax records, fill out the forms, do the research, etc. Do you really want that hanging over your head any longer?

Pro: You'll Have More Time to Seek a Refund Later

Let's say you file your tax return by July 15 and pay $100 in tax. In August 2023, you discover a mistake on the return that results in a refund to you. In that case, you're out of luck – it's too late to claim the refund. However, if you extend this year's return filing deadline to October 15, you'll still have time to request a refund when you discover the error in August 2023.

• 11 Tips on How and When to File an Amended Tax Return

The tax law allows three years from the time a return is filed or two years from the time the tax is paid, whichever is later, to claim a refund related to the return. The later you file, the more time you'll have to file a refund claim later. While this type of scenario is relatively rare, it does happen. And if it happens to you, you'll thank your luck stars that you took an extension if it means you won't lose out on a refund.

Con: This Year's Refund Will Be Delayed

If you're expecting a refund this year, think twice about taking an extension. The longer you wait to file your return, the long you'll wait to get your refund. If you need the money now, then file by July 15. You can also speed up your refund by e-filing your 2019 tax return and opting to have your refund deposited directly into your bank account. The IRS can process electronic returns and refunds much faster than it can handle paper returns and checks.

• 8 Money-Smart Ways to Spend Your Tax Refund

This year, the IRS may also pay you interest on your tax refund if your return is filed by July 15. Interest will generally be paid from April 15, 2020, until the date of the refund (although interest payments may be received separately from the refund).

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Pro: You Might Saving on Tax Preparation Fees

Tax preparers are busiest right before the tax filing deadline, so expect to pay premium prices if you want your return filed right before the due date. However, things slow down for preparers in the fall. That often translates into lower tax preparation fees, which you can take advantage of if you get an extension.

• 9 Things Your Tax Preparer May Not Want You To Know

In general terms, prices for tax services can vary widely depending on a number of factors, including the complexity of your return, where you live, and the preparer's experience. That's why it's important to get a quote before settling on a preparer. You might not get an exact price up front, but at least make sure you understand how the price is determined (e.g., a preparer might have a set fee for each form required, charge you by the hour, or start with a minimum fee and tack on additional costs depending on the complexity of your return). However, walk away if a preparer bases his or her fee on a percentage of your tax refund — you don't want a preparer claiming questionable tax breaks on your return to inflate the fee.

Con: You Still Have to Pay Your Taxes Now

If you get an extension, you won't have to pay your taxes until October – WRONG!! The extension is only for filing your tax return. . .not for paying any tax you owe. You still have to estimate the amount of tax you owe (if any) and pay that amount by July 15. If you don't, the IRS will charge you interest on the unpaid balance and probably tack on additional penalties for paying late.

• Tax Tips for Last-Minute Filing

If you can't pay the tax you owe, pay what they can by July 15 and check out the various IRS payment options for what's left. You can set up a payment plan, make an "offer in compromise," or request a temporary collection delay. Some people even take out loans to pay the taxes they owe, since loan costs are sometimes lower than the IRS interest and penalties you'll owe for not paying on time.

Pro: You'll Avoid Late Filing Fees

The penalty for failing to file your return on time is 5% of any unpaid taxes for each month (or part of a month) that a tax return is late. However, the penalty won't exceed 25% of your unpaid taxes. If your return is over 60 days late, there's also a minimum penalty for late filing – the lesser of $435 (for tax returns required to be filed in 2020) or 100% of the tax owed. So, if you owe taxes this year that you can't pay right now, taking an extension will at least let you avoid (or lessen) late-filing fees, since the penalty won't start until after October 15.

• 8 Ways You Might Be Cheating on Your Taxes

You'll still be hit with other penalties if you don't pay any tax due by July 15. The failure-to-pay penalty is 0.5% of the unpaid amount for each month, or part of a month, up to a maximum of 25%. The penalty increases to 1% if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy property. If you file your return by its due date and request an installment agreement, the goes down to 0.25% for any month in which an installment agreement is in effect. Interest will be charged on the unpaid amount, too.

Con: You Don't Get More Time to Do Other Things

The tax return filing extension is very limited. It buys you more time to file your return, but it doesn't help with other things. As mentioned earlier, you still have to pay any tax owed by July 15. It also doesn't delay the payment of estimated taxes, give you more time to contribute to an IRA or health savings account, or extend any of the other July 15 due dates. After July 15, married couples can't file amended separate returns if they previously filed a joint return. A filing extension also does not give security traders more time to make a mark-to-market election.

• 20 IRS Audit Red Flags

If you do get an extension, don't be lulled into thinking that you can sit back and relax for three months. You very well may have other tax obligations to fulfill in the meantime (e.g., making third quarter estimated tax payments or reporting tips to your employer). You also still might have to file a state tax return – or at least file a separate extension request with your state (check with the state tax agency where you live for specific rules to follow).

Pro: You Might Get More Time to Beef Up Your Retirement Savings

For self-employed people, getting a filing extension can also provide more time to contribute to a retirement savings account. Normally, contributions to a Solo 401(k) plan or Simplified Employee Pension (SEP) IRA for the previous calendar year have to be made by the original tax return filing deadline (July 15 this year). However, if you get an extension to file your return, you also get an extension to contribute money to these types of accounts.

• How Much Can You Contribute to a Traditional IRA for 2020?

There's another perk that everyone gets – whether you're self-employed or an employee – by claiming a filing extension. If you exceeded the 2019 IRA contribution limits, you get three more months to withdraw the excess funds and, thereby, avoid a stiff penalty. If you don't get a filing extension, you'll have to take out the extra contributions by July 15.

Con: You Might Need a Completed Return for Other Things

If you're applying for a mortgage or other loan, you'll probably need to submit a tax return. You might need one to apply for certain government benefits, too. If delaying your tax return means you'll have to wait to apply for these or other important things, then maybe it's best just to file your return now.

Rocky Mengle is Tax Editor for Kiplinger Washington Editors.