I don't have enough money to pay the taxes I owe. Should I file an extension?
A common misconception is that filing an extension allows you to pay your tax later.
That is not true. An extension to file is an extension to file your tax return later, not pay your tax later.
If you owe tax or think you owe tax when your tax return will be filed, the government wants it now.
Actually, they wanted it during the year. The US tax system is based on a “pay as you earn” system which means that you are supposed to pay the tax that you owe as you earn the money.
That’s why if you are a W2 wage earner you have taxes deducted from each paycheck.
If you are self-employed, you are expected to pay estimated taxes at least quarterly.
If you are retired and your income is subject to tax, you are supposed to pay that tax as the year rolls on. That’s why a consistent focus of my articles and my practice is helping you to find ways to lower your tax bill and by doing so you owe less tax, or you at least pay the tax on time and avoid penalties which are essentially another form of tax.
Since tax filing deadline is approaching as this article is being published and folks are trying to decide whether to file on time or file an extension, its important to recognize that filing an extension does not mean that you get to pay the taxes that you owe later in the year.
If you really don’t have money, then you don’t have money to pay. You might have money to pay and not know it. For example you could have access to a line of credit in your business or some other source of cash.
Whether or not to tap into that that is a far deeper discussion than this article will get into and you need to consult your tax and financial planner (hopefully the same person, right?).
Some occupations require you to never have unpaid taxes, so not paying could have non -tax consequences to your job. Not paying as a minimum opens you up to possible penalties for underpaying and interest payments on top of the taxes that you owe, neither are pleasant thoughts.
I see folks who don’t want to pay a dime to the government until the very last minute even if it means a penalty, and on the other side of the spectrum there are those who never want to incur even a dollar of penalty so overpay the taxes knowing they will get it back as a refund.
Both are valid positions within reason so I’m saying not one is right and one is wrong. But for those that consistently get refunds when they file their tax returns, an extension process is much easier since they in essence do not owe more tax.
Whereas those who consistently under pay their tax for whatever reason should strongly consider making an estimate of what they owe and pay that with the extension to file.
There can be very valid reasons to extend your tax return. For example since I work with a lot of business owners, filing an extension to file the business return allows you to file it as late as September 15 or October 15 depending on your company structure.
Then, depending on the type of retirement plan we have worked together to setup, that gives you more time to accumulate finds for that retirement plan contribution, which in turn circles back and lowers your tax bill.
That’s a perfect example of why tax planning and financial planning should be integrated.
So filing an extension to file is sometimes a good strategic move to allow for other beneficial events to happen. It just needs to be done with a consideration of the facts and circumstances.
If after filing your tax return you still cannot pay the taxes owed, its almost always better to at least file the tax return. Not filing a return can get you a penalty as well as not paying the tax that you owe, so consider at least avoiding the non-filing penalty.
For the IRS, you can go to IRS.GOV to setup an online payment plan. For your state, seek out your state tax website to see what method that they offer.
Action items –
- Evaluate if you should be considering filing an extension now and not on April 14.
- If you have not yet set up a retirement plan for your self-employed or small business account contact me and let’s talk through the tax and other financial benefits of doing so.
The information in this and other articles is intended to be educational in nature only. Not tax, legal or investment guidance for you specifically. Each person’s situation is unique and you must seek appropriate professional guidance that can address your unique situation.
Schedule an introductory call with Matt
808-954-6402
matt@vwshi.com