Smart Money Choice$

Are you having fun? They say that time flies when you are. The fact that April 15th has nearly arrived and has caught a lot of people by surprise, must mean there’s a lot of fun going on! That’s the positive spin, anyway.

If you are one who had intended to have your taxes handled by now, but you still haven’t gotten to it, no worries. That’s why the IRS allows you to apply for an automatic 6-month extension to file. They realize that time can get away from us all. That is, at least when it comes to preparing your tax return. But the empathy stops there.

By filing a Form 4868, yes, you will automatically get six more months to FILE your tax return. No questions asked. However, there is no such thing as an extension to pay any taxes owed.

Of course, that’s just more proof of how whacked our tax system is. Isn’t the purpose of preparing a tax return to determine whether or not you have paid enough taxes in based on the amount of your income that’s subject to tax? So if you already knew the answer to that question, why would you need to file an extension in the first place!?! Typical governmental circular reasoning, isn’t it?

But fortunately, there are easy ways to deal with this dilemma.

How to Do It

First, you need to fill out and file the automatic extension form (Form 4868). You can do that for free online using the IRS’s FreeFile system. But if you prefer the old fashioned send-it-in-the-mail method, you can also fill out a PDF version of the form, print it out, and mail it in if you like. Just be sure it is postmarked by April 15th.

However, it is actually safer and more reliable these days to file for extension online. You will receive a confirmation from the IRS usually within 24 hours, giving you proof that your form has been filed successfully. But when you file by paper, you’ve just got to hope that it gets there safely AND that the IRS doesn’t lose it. (The IRS loses paperwork on a regular basis!) The only way you’ll know if they got it or not is if you don’t get any nasty notices from the IRS later asking you for your tax return.

My recommendation: File electronically if at all possible.

What Information Do You Need?

Fortunately, Form 4868 is the shortest and quickest tax form you’ll ever need to use! Heck, once you fill in your name, address and social security number, you’re half-way there!

After that, there are only four other lines you will need to fill in (in most cases). The toughest one is Line 4, where you must estimate your taxes for 2008. Of course, you won’t know that number for sure until you actually complete your tax returns. So we’re talking about your best guess here.

But you’ve got to make it a good guess. If you say you owe less in taxes than you really do, the IRS will smack you with underpayment penalties and interest. Remember, this is an extension to file, not one to pay.

There are, however, a couple fast and dirty ways to estimate smart.  Probably the easiest way is to take a look at last year’s tax return. If you made around the same income in 2008, your tax liability should be roughly the same. And even if you made more, you won’t be penalized for underpaying as long as you pay 100% of your 2007 tax liability. So, to be safe, if you really have no idea what your 2008 taxes will be, enter 100% of your taxes were last year (“total tax” Line 63 of your 2007 Form 1040).

Next you’ll need to fill in how much you’ve already paid in for 2008. Add up all federal estimated tax payments you’ve made, any overpayments applied to 2008 from last year, as well as taxes withheld from your W-2 or 1099 forms. The total should be entered on Form 4868 Line 5.

Finally, subtract the amount you’ve already paid in from the estimated tax liability, and you’re probably done. That is, if you paid in more than the tax. If that’s the case, all you need to do is file this form before midnight on April 15th. You now have until October 15, 2009 to finish up and file your tax return. Isn’t that a relief?

But What If You Didn’t Pay In Enough?

If, you have a balance due, you will need to pay that amount by April 15th. Again, you can do this by paper or electronically. When you file the Form 4868 online, you will be given instructions on how to make your payment. Again, you can do so electronically, use a credit card or by mailing in a check.

What If You Can’t Pay The Full Balance Due?

If you can’t pay the full balance due, simply pay as much as you can right now, and enter that amount you are paying on Line 7 of Form 4868.

The IRS will eventually send you a bill for the rest, including late payment penalties and interest. But don’t sweat it just yet. Remember the balance due is based on an estimate only. The final numbers will be known once you complete your tax return, so it might not be as bad as it may seem now.

Just be sure to send in Form 4868 by April 15th. And if you owe a payment, don’t delay filing the form. That will only cost you more. The smart choice is to file for an automatic extension on time.

Now you can breathe a sigh of relief because you now have six more months to get your taxes in order. That wasn’t so bad now, was it?

~Gabrielle

P.S. If you still need to get your bookkeeping records in shape for completing your taxes, and you use QuickBooks, be sure to check out the time saving tip for quick and easy tax prep at QB QuickTips and check out my latest mini-lesson that will make QuickBooks do a lot of the tax organizing for you this year, and you may never need to go on extension again.