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Financial Advice

The Lowdown on Extensions

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The Lowdown on Extensions
As April rolls around, the procrastinators among us begin frantically babbling about needing an extension for their tax return, believing then all will be right in the world. "Au contraire, mon chere."In English, please? "Ah, yeah-no."

First of all there's a lot of misunderstanding about filing extensions. Many people think that by simply sending in an extension-Form 4868 for the IRS-they are off the hook for filing and paying their tax bill. Here is what the IRS specifically states about extensions: "Form 4868 does not extend the time to pay taxes. If you do not pay the amount due by the regular due date, you will owe interest. You may also be charged penalties."

Most last-minute filers don't know that if you don't owe any federal taxes, then you don't need to file an extension.  But, you may still owe the state and should file an extension with it. Unfortunately, all too many actors don't even know how much money they received throughout the year, let alone if they owe taxes on that income.

Actors have different income sources that almost certainly change from year to year. What held true last year has little bearing on this year's return. You may have had more 1099 (non-taxed) income, or perhaps you booked a commercial that ran like gangbusters. That brings me to the other, even bigger difference you will see from one year to the next-withholding.

Just because one payroll company withheld enough tax last year doesn't mean they will do it the same way this year or that your combined income hasn't moved you into a higher tax bracket.  Though most theatrical (TV and film) work is withheld sufficiently, commercial payroll companies usually under-withhold. We've had clients who've earned $100,000 from commercials but found out the hard way that little or nothing from that income was withheld for federal taxes. They may owe $20,000-just to the IRS, not including possible state and city obligations.

Because our income and expenses are so different from year to year, if you haven't reconciled your income with your expenses, how can you possibly know if what was withheld is even close to what you need?

So if you think that simply filing an extension gets you a reprieve from having to get all your tax information together, you may be sadly mistaken. The bottom line is, you usually have to do all the work of preparing your return just to be able to fill out the extension forms accurately.
Although a late-payment penalty may not be charged if you have reasonable cause, to the IRS "reasonable cause" is when "at least 90 percent of your actual 2011 tax liability is paid before the regular due date of your return through withholding, estimated tax payments, or payments made with Form 4868."

The late-payment penalty-on top of the interest that you will owe-is usually half of 1 percent of any tax not paid by the April deadline. It is charged for each month or part of a month the tax is unpaid. The maximum penalty is 25 percent.

Clearly you should just get your shit together, get to your tax preparer with all of your tax forms and expenses clearly categorized, and get your taxes filed.

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