Common Mistakes When Filing a Tax Extension

Filing a tax extension can be a smart financial move, especially for individuals with complex tax situations, business owners, and high-net-worth individuals who need extra time to finalize their returns. However, misunderstanding how tax extensions work can lead to costly penalties and interest charges.

Before you file an extension, make sure you avoid these common mistakes that could end up costing you more in the long run.

 

Common Mistake 1: Thinking a Tax Extension Means an Extension to Pay

One of the biggest misconceptions about tax extensions is that they give you extra time to pay your tax bill. They do not.

A tax extension only gives you more time to file your tax return, but any taxes owed are still due by the original tax deadline which is typically April 15 (or the next business day if it falls on a weekend or holiday).

What Happens If You Don’t Pay on Time?

• The IRS charges interest on any unpaid taxes, starting from the original due date.
• You may also face a failure-to-pay penalty, which is 0.5% per month on the unpaid balance (up to a maximum of 25%).
• If you don’t file at all, the penalty is even worse: 5% per month on the unpaid taxes, up to 25%.

How to Avoid This Mistake

Even if you’re filing an extension, estimate your tax liability and pay what you owe by April 15 to avoid interest and penalties. If you’re unsure of the exact amount, overestimating is better than underestimating, as any excess will be refunded when you file your final return.

 

Common Mistake 2: Not Estimating Taxes Correctly, Leading to Penalties

Filing an extension requires you to estimate how much you owe the IRS. However, underestimating your tax bill can still result in penalties and interest.

The IRS expects taxpayers to pay at least 90% of their total tax liability by the original deadline. If you underpay, you could face underpayment penalties, if your estimated payment is too low, or additional interest charges, even if you pay the full amount when you file.

How to Avoid This Mistake

• Review your previous year’s return as a baseline for estimating your current tax liability.
• Consider your income sources: If you have investment gains, business income, or other taxable events, factor them into your estimate.
• Work with a tax professional to ensure accuracy and avoid underpayment penalties.
• Use IRS Form 1040-ES to help calculate estimated taxes if needed.

 

Common Mistake 3: Forgetting State Tax Extension Rules

Federal tax extensions don’t automatically apply to state taxes. Each state has its own rules for filing extensions, and failing to follow them could result in penalties at the state level.

Key State Tax Extension Mistakes:

• Assuming your federal extension applies to your state return: Some states grant automatic extensions if you file a federal extension, but others require a separate state extension form.
• Not paying state taxes by the deadline: Just like the IRS, states expect payment by the original due date, even if you file an extension.
• Missing state-specific deadlines: While the federal extended deadline is typically October 15, some states have different deadlines.

How to Avoid This Mistake

• Check your state’s tax agency website for extension rules and deadlines.
• File a separate state extension if required.
• Make an estimated payment for your state taxes by the original due date to avoid penalties and interest.

 

Final Thoughts: Avoid Costly Tax Extension Mistakes

Filing a tax extension can give you valuable time to finalize your return, maximize deductions, and ensure accuracy. However, it doesn’t exempt you from paying your taxes on time.

To avoid penalties and unnecessary costs:

• Pay at least 90% of your estimated tax liability by April 15.
• Double-check state extension requirements.
• Consult a tax professional to avoid underpayment mistakes.

By handling your tax extension properly, you can gain the extra time you need without facing unexpected financial consequences.

Need personalized guidance? Your tax advisor or wealth manager can help you navigate tax strategies and optimize your financial plan.

 

Disclaimer: The information in this article is not presented as personal, financial, tax, or legal advice and should not be relied upon as a substitute for obtaining advice specific to your situation.