Filing your taxes Oct. 15? Here's what you need to know

Filing your taxes Oct. 15? Here's what you need to know

For most Americans, tax day came and went on April 18. However, for many financial and tax advisors whose clients requested a six-month filing extension, Oct. 15 is tax day all over again.

However, filing an extension doesn’t mean you don’t have to pay anything until October. A tax extension gives you more time to file, but not more time to pay. Every U.S. citizen must pay their tax liability by the April deadline, regardless of whether they request an extension.

For many Americans, waiting until October to file is often necessary to ensure the accuracy of their returns. If someone is involved in 150 partnerships, for example, the odds of all 150 of those partnerships having their documents in order by April are slim to none. In those cases, tax advisors use the data they have in order to make a best-guess estimate of an individual’s tax liability. As the year goes on, the information needed to file begins to trickle in as the client’s partnerships and investment entities file their tax returns.

Additionally, certain elections must be designated on a timely filed tax return.

For example, individuals with foreign investments need to make certain elections regarding the recognition of income on their tax returns, which must be made on a timely filed return. This often means they cannot file in April, because they simply don’t have the data they need in order to make a timely election.

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Individuals who are self-employed and have a set retirement plan could also request an extension if they are unable to make the required annual contribution before April. If they don’t have the money they need in April, but know they can get it together within the next six months, it makes sense to go on extension so they can have time to make that plan contribution and get the deduction for the prior year.

Many people assume that requesting an extension on their taxes will put them at a greater risk for an audit, but that is simply not true. The fact of the matter is that the more complex your return, the more likely you are to be audited. As more complicated returns typically require an extension to be filed accurately, there may be a perceived correlation between extended filing and auditing. But correlation does not equal causation in this case.

There are, however, penalties and allowances for extensions. If you don’t pay a certain percentage of your tax in April, or if the estimate you claim on your extension request form is not an honest amount, your extension could be disqualified. When this happens, you will be required to pay interest on any unpaid taxes from April onwards, as you are technically filing late.

If you have filed an extension on your taxes, chances are you are not the one preparing them. These complex returns are best handled by a tax professional, who can maximize your deductions and track down obscure tax forms you probably don’t know about.

That said, there are some things you can do to make the life of your tax preparer easier come October 15. First, it’s important that you are aware of your own deadlines so you can get the necessary paperwork to your accountant as early as possible. Complex taxes are difficult to do at the last minute, and your tax advisor likely has a lot of other returns to file at the same time. You want your advisor in top form when he or she is filing your taxes, and being first on that person’s to-do list is a good way to ensure that.

It is also very important that you remain communicative and available to answer questions as needed. Some people frequently travel the world for business, and when a tax deadline is coming up, it’s imperative that the client alerts his or her tax preparer about any upcoming trips during which he or she will be unreachable. Some tax returns contain numerous elections and attachments that cannot be filed electronically and being unable to get a hold of clients around the October 15 deadline can have catastrophic consequences.

While the October tax extension might seem like a privilege reserved for the affluent, the option is open to all U.S. citizens who need more time to file an accurate tax return. In order to take proper advantage of this deadline, you need to fully understand the requirements, risks and rewards for doing so.

Contrary to the popular belief, paying your taxes doesn’t have to be taxing. Stress-free tax filing can be achieved through diligent planning and preparation.

— By Donna Cuiffo, senior tax partner at Clarfeld Financial Advisors

Published at Tue, 09 Oct 2018 13:52:00 +0000

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