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Financial Advice

Getting an Extension

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Getting an Extension
There continues to be the perception that getting an extension allows you to put off both filing your tax return and paying your taxes until the extension deadline of Oct. 15. It's not so.

While an extension does allow you to file your return later than the regular deadline (which this year is April 18), if you owe any money and don't make the payment by the regular deadline, then the Internal Revenue Service and your state tax agency have the right to charge you interest and penalties on the outstanding amounts due.

Filing a late return can be very expensive. If your return is more than 60 days late, the minimum penalty is $135 or the balance of the tax due on your return, whichever is smaller. The IRS can continue to add a charge of 5 percent per month, up to a maximum of 25 percent. And don't forget that if you file the form (called Form 4868) that grants you a federal extension, you must also get a state extension. The late-filing penalties for your state may be the same or even greater than the IRS charges.

But whether you file your return on time or get an extension, if you haven't made all of your tax payments by April 18, you'll have to pay a late-payment penalty of 0.5 percent per month on your outstanding debt. In addition, the IRS charges an interest rate of 3 percent per year, compounded daily. You can usually escape any additional interest or late-payment penalties on your federal debt if at least 90 percent of your tax liability has been paid by the regular deadline, through normal withholding or by sending in the payment with your extension form. The form requires that you include an estimate of your total tax liability for the year, the total of all your payments already made (through withholding and other means, such as quarterly estimated taxes), the balance due, and how much you are paying with the extension form.

If you don't owe money, then there is no late-filing penalty and the IRS (and your state) can't charge you late-payment penalties or interest, because there is no debt. Therefore, if you don't owe any taxes, there is no reason to file for an extension. Unfortunately, most actors can't be sure they will be due a refund until their return has been fully prepared. They usually don't make the same amount each year, so they can't know if they have had sufficient taxes withheld. Time after time, actors believe that the payment companies have taken out enough to cover their taxes, only to discover that it hasn't happened. For actors who received significant income from commercials, this is particularly likely to be the case.

To figure out your tax liability, you have to enter the income from all your W-2s, plus any other income, on your 1040 form, then list all the expenses you had as an actor. By the time you have done all that, you have essentially prepared your return, so why would you want to file for an extension?

I am well aware there are actors who think their time is more valuably spent doing anything but working on their taxes. Consider the performer who came into our office the other day to have tax returns for two past years prepared. Although she thought she would owe taxes (the reason for her delay), she ended up receiving more than $7,000 in refunds from the IRS alone. As thrilled as she was, she knew she had made a big mistake in allowing the IRS to hold on to her money interest-free all that time. She spent two days putting her records together and made $3,500 each day!

That's why we always try to persuade actors to prepare their returns on time, without filing for an extension. But remember, if personal reasons prevent you from filing on time, it's imperative that you send in the extension form. 

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