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How to File a Free Income Tax Extension

This article was written by in Taxes. 12 comments.


I finally provided my tax details to my accountant yesterday. As I expected, there won’t be enough time to work out the details before today’s tax filing deadline, so I’ll be filing extensions. In years past, when I filed for myself and my taxes were simpler, I usually waited until the last day. My procrastination has been helped by the availability of online filing. I’m thrilled to no longer need to run to the post office late at night on April 15. (This year, the deadline is April 17 due to a holiday in D.C.) In recent years, I could just as easily fill out the paperwork and file in my pajamas without leaving the house, even from the comfort of my own bed with a laptop computer.

The last few years, my taxes have grown more complicated, and my accountant now has me in the habit of filing an extension every year. This gives me six extra months to file my paperwork, a task getting increasingly complicated, having moved from an employee with only W-2 income, to a “part-time” self-employed individual with some income recorded on W-2 forms, some on 1099 forms, and some on no forms, to the sole owner of a business filing with an S-Corp status, with K-1 forms in addition to 1099s and W-2s, to an even more complicated situation in 2011.

Filing a federal extension for your personal taxes is free and simple. Before you get started, find your previous year’s final tax return (or just your adjusted gross income amount) to verify your identity with the IRS. Make sure you know your other personal information, like Social Security number, and have the information from your W-2 ready.

Step 1. Visit the IRS-sanctioned website, Free File Fillable Forms. Popular tax filing software programs also offer customers the ability to file for an extension. With the IRS-sanctioned website, you can be sure that the service will always be free and you won’t be distracted by advertisements for paid products. As of today, it’s free to file an extension using TurboTax, but there is no guarantee that this method will be free on the day you want to file your extension.

Step 2. Create your account. Whether you use the Free File Fillable Forms website (hereafter called “FFFF” for brevity) or commercial software, you’ll be required to create an account or login to an existing account. If you’re creating a new account, select a user name that will be easy to remember. With FFFF, you’ll have the opportunity to print your account username and password for reference.

Step 3. Select the appropriate form. With FFFF, you have the choice between forms 1040, 1040A, and 1040EZ. You’ll need to select the form that’s right for you. Form 1040 is the most comprehensive choice, so it is always safe. Depending on your situation, you may not be able to file your taxes using forms 1040A or 1040EZ. Keep in mind that you can still use TurboTax, H&R Block, or any other software to file your taxes before the extended deadline. Even if you file your extension using FFFF, you do not need to return to the IRS-sanctioned website to finalize your tax return. For example, I filed my extension via FFFF myself, but my accountant will be filing my tax return later this year using the method of his choosing. If you plan on finishing your return using some other method, just choose Form 1040 here by clicking the “Start 1040″ button.

Step 4. Complete your personal information. Begin by entering your information at the top of form 1040. Include just your name, address, and Social Security number. At the top right of the screen, there is a button labeled “EXT” that looks like the image included here. Click that button (on FFFF, not here).

Step 5. Estimate your tax liability. Here’s the problem with filing for an extension: the IRS won’t extend the deadline for paying any tax that you owe. Only the paperwork receives the extension. If you haven’t paid your full tax bill, you may owe money. You need to estimate how much total tax you owe for last year’s income. On the form, you will then subtract your total payments, including withholding from your job. To avoid having to pay any penalties, your total payments must be 100% of what you owe. I added up all the payments I made, included withholding from my former day job, the amount of last year’s overpayment that I applied to this year’s taxes, and the estimated payments. Since I paid more than my estimated total liability, I did not need to make a payment when filing for the extension.

Step 6. Complete the form. You’ll need to select a PIN, enter your birthday, and consent to the disclosure statement.

Step 7. Pay your tax liability. If you’ve determined in Step 7 that you need to pay when filing for an extension to avoid a penalty, you have a few options. You can print form 1040V and send a check to the IRS, or you can provide your tax filing service, whether FFFF or a private software company, with your banking information. The IRS will pull the amount you specify from your account electronically using direct debit.

Step 8. Submit your extension. Once all the information is complete, the “E-File Extension Now” button will be available at the top of the page if you’re using FFFF. With other software, you will be prompted to file your extension paperwork at the end of the process, though in some cases, you might need to pay a fee. You’ll receive responses through email twice. The first will come as soon as you submit your form to notify you that the extension has been submitted to the IRS. Within hours, if there is no problem with the information you entered, you should receive a second response to notify you that the IRS has accepted your extension paperwork and you will now have an extra six months to file your taxes.

Don’t forget to look into filing an extension for your state taxes as well. In New Jersey, where I live, this is easy. I do not need to file any paperwork in New Jersey for my personal extension. When the IRS grants an extension for federal tax returns, New Jersey will automatically allow the later deadline. If I didn’t pay enough state taxes throughout the year, I would need to pay the state when filing for the extension, just like I would need to with the federal tax extension. When I file my paperwork later this year, I can include a copy of my federal extension form and the state will not penalize me for filling late. Different states may operate differently, so always verify what you need to do before the initial tax filing deadline.

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Payroll Tax Cut Extended for Two Months

This article was written by in Taxes. 5 comments.

After political bickering, the House of Representatives agreed to make a deal with the Senate to extend the payroll tax holiday. This tax cut reduced the payroll tax — a tax separate from but often associated with federal income tax — from 6.2% to 4.2% of the first $110,100 of wages. The tax benefits Social Security, a program politicians often claim is in danger of being underfunded. The payroll tax rate was scheduled to return to the normal amount of 6.2% at the beginning of 2012, but once a bill is signed into law, this rate will continue until the end of February 2012.

The Senate was only able to pass a bill that extended the tax cut for two additional months. In general, policy makers believe the lower tax rate will help stimulate the economy, but there are concerns about the effect of the long-term reduction into Social Security. After the Senate passed the bill, the House eventually relented. Part of the deal between the House and the Senate requires representatives to start working immediately on a new plan to find a way to extend the lower tax rate until the end of 2012.

Expanded federal unemployment benefits were also scheduled to end at the beginning of the year, but this bill would extend these benefits for two months as well.

The extension of the payroll tax cut and the expanded unemployment benefits will be paid for by an increase in the amount mortgage lenders must be Fannie Mae and Freddie Mac to insure loans.

An average project manager saved $1,300 last year due to this tax cut of two percentage points, and if politicians agree on extending the cut for all of 2012, that amount could double by the end of next year. When the tax cut was announced initially last year, I offered 20 suggestions for using the money you save through the payroll tax cut. With doubled savings, the opportunities for using the cash benefit are even greater.

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Year End Reminder: Donate to Charity

This article was written by in Charity, Taxes. 6 comments.

The year is quickly coming to a close, and the first priority for many people right now is getting through the holidays with as little stress as possible. Focusing solely on the holidays at the expense of your household’s financial needs can only add to stress later, so it might help to get a few items in order now rather than attempting to manage your year-end tasks in the one week between Christmas and the new year. A few days ago, I suggested changing your 401(k) contribution level now because of the time it takes for changes to take effect, and today, I’m looking at charity.

A tax benefit shouldn’t be the sole reason you contribute to charitable organizations, but there is a federal tax deduction for charitable contributions, and it’s better for a family’s own financial situation to take advantage of this benefit if plans call for charity regardless. Unlike other benefits that allow qualification extensions into the new year, to receive a deduction on this year’s tax return, the organization to which you donate must receive the contribution this calendar year.

Charity BoxUnfortunately, the time you spend volunteering for a non-profit organization is not tax-deductible. While volunteering could benefit an organization more than a moderate financial contribution, the tax code favors gifts of value, not time.

Choose your recipient

Charity isn’t an end-of-year activity. If you value a certain cause, doing what you can throughout the year can be a more effective way of maximizing the benefit you can provide to a non-profit or religious organization. Nevertheless, in busy lives, people often don’t think about finalizing their charitable gifts until the spirit of the holiday giving season is in full-force. If you think about giving throughout the year, you may already have one or more intended benefactors.

If you have a charity in mind or if you need to find one, take the time to ensure the organization is not only legitimate but each dollar you provide will do the most good.

Charity Navigator is an indispensable tool. Using Charity Navigator, you can research any non-profit organization. You can see an evaluation of how efficiently the organization uses donors’ contributions and read the latest financial reports to determine how highly the executives are compensated. Charity Navigator will also help you ensure the organization you choose is a qualified 401(c)3, a non-profit organization recognized by the government.

I like to evaluate what percentage of contributed money is used for marketing, particularly. Marketing is of course very important to an organization, and effective marketing can pay for itself in increased donations, but if too much money is spent on marketing and not projects that directly apply to the organization’s mission, you have to consider that your donation may be more effective elsewhere.

In choosing an organization, consider your own values. You may be aware of an organization whose goals you admire and respect, and can start there. But if not, consider what issues are central to your core beliefs. Would you like to see poverty eradicated around the world? Do you believe people can improve their lives by living in a new home? Are you concerned that budget cuts in education are affecting children’s ability to receive a well-rounded education? Should more resources be committed to helping military veterans? You should be able to find an organization catering to the same issue that you consider most important.

When you complete the donation, be sure to keep a copy of the receipt for tax purposes. The receipt should show how much of your contribution is tax-deductible. If you receive a thank-you gift in return for your contribution, the amount you provide will most likely not be 100% deductible.

Open a donor-advised charitable fund

If you can’t or won’t decide which organization is most relevant to your values and charitable desires, open a donor-advised charitable gift fund. I opened this type of account a few years ago at Fidelity. The charitable gift fund allows an individual to contribute today and receive the tax benefit, while granting donations from the fund to worthy organizations over time. By using the gift fund, I could contribute funds throughout the year, invest in index funds, and assuming the funds appreciate in value, donate even more to the non-profit organization.

Even if the value goes down, most organizations can receive gifts in stocks or funds, so they can choose to sell and use the cash when it’s best for the organization.

You cannot withdraw the money you’ve contributed to your charitable gift fund, however. You can’t use a charitable gift fund as a saving or investment vehicle for yourself. Once you transfer money to your charitable gift fund, it becomes the property of the fund itself or its parent company. That’s the reason you can take the tax deduction immediately rather than waiting until you grant your donation to a non-profit organization.

Each year, I donate to DonorsChoose, an organization that helps teachers receive the resources they need for effective classroom instruction, an organization within my undergraduate university, and a few other organizations that match my values or are in response to important issues.

If you donate to charity, do you do so during the year or only at the end of the year? How important is the tax deduction?

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What Happens If The Debt Ceiling Isn’t Raised?

This article was written by in Economy. 42 comments.

Democrats and Republicans in Congress, not to mention the President, are battling over what to do about the debt ceiling, an arbitrary limit of government borrowing set by Congress. The government borrows money from investors in order to pay its expenses, like salaries and Social Security, and if the government is unable to borrow, eventually money will run out. That’s a consequence of spending more than you earn, a basic personal finance concept that doesn’t translate well to building what was one point, though still may be, the most powerful national or sovereign economy in the world.

The government has approached the debt ceiling before, and every time, Congress has acted to raise the debt ceiling. Today, politicians are more divided than ever, and it’s looking like a firm deal is not going to happen right away. The most likely outcome is that Congress will delay the issue with a temporary extension of the debt ceiling, moving any action to the future — and closer to the next presidential election when more citizens are ready to engage in political fights. There’s a very slim possibility that the stale mate will continue past August 2, which is when, according to the Treasury Department, the obligations require more than the government has, and some tough choices will need to be made.

If this does happen, President Obama will need to make some tough decisions about who does not get paid. The most likely option will be to furlough parts of the federal government, so military salaries and Social Security payments would not be interrupted.

Rating agencies like Standard & Poor’s will likely downgrade the official AAA rating for the United States’s debt. Even if a temporary solution raises the debt ceiling, this is still a possibility. Many investors would not lend money to the government if its credit rating slips, and interest rates may rise to compensate willing investors for the perceived risk in the system. These interest rates could affect everything from mortgage interest rates to credit cards, making the cost of borrowing higher throughout the economy. However, Japan’s rating was lowered in 2002, and the country suffered no ill effects, so it remains to be seen if rating agencies’ opinions matter as much as people believe. Even S&P has indicated the effects of a downgrade would be minimal.

I think the BBC, whose audience may not be familiar with the intricacies of the U.S. Constitution, sums up the situation interestingly:

Why can’t the Obama administration borrow more? Because it is not in their power. All government borrowing has to be approved, under the US Constitution, by Congress… Perversely, Congress also sets the government’s spending commitments and tax-raising powers. This puts the Obama administration in the impossible position of being required to spend more than it earns, while also being prevented from borrowing the difference.

Another possible consequence is the further reduction of the value of a U.S. dollar compared to other currencies around the world. The dollar’s value has been falling for years, so it may difficult to say if a continued fall is the result of a government default, but it certainly can’t help. If the dollar continues to fall, the typical reaction would be to put money into hard assets like real property.

Over the past few years, people and businesses who could qualify as borrowers have had the benefit of very low interest rates. If interest rates do increase, it would come at a bad time. The country is still trying to claw its way out of a recession, and high interest rates are bad for businesses trying to expand. The good news is only some businesses are trying to expand; most are saving their cash as is evidenced by the reluctance to hire more than the bare minimum of employees.

If the consequences of a ratings downgrade are not as dire as the media portrays, as opined by experts, the issue shouldn’t really be receiving all the attention it has. It does bring to light the issue of spending more than the government can afford, but it’s more of a political issue than an economic issue. Means that our representatives are using the debate on the debt ceiling to distract from the bigger economic problems we are facing, like unemployment, a lack of business growth, a substandard education system, endless spending on wars, and ineffective regulation of the financial industry.

Photo: o palsson
Kiplinger, New York Times, BBC, Bloomberg, NPR

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Last Minute Tax Filing Tips

by Flexo
Tax

With one week before the deadline, many people are just starting to think about filing their tax return. The problem I’ve often encountered with waiting to the last minute is it’s easy to miss important items. Many years ago, I filed in the manual style: my only tools were a calculator and pencil. Although my ... Continue reading this article…

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Personal Balance Sheet, March 2011 ($664,370, +7.4%)

by Flexo

My financial for March are finalized enough for me to publish the numbers. Although I like the reports I post every month to be as accurate as possible, there are often things I forget or haven’t been finalized, like income from additional sources or bills from vendors. Unfortunately, last month’s net worth has been revised ... Continue reading this article…

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Podcast 102: Tax Preparation, Tom Dziubek

by Flexo

Consumerism Commentary Podcast host and producer Tom Dziubek returns this week, in the role of a guest. Tom has spent the past few months working for a financial services firm focusing on preparing and filing tax returns for clients. Today, Tom is joining me to speak about common and uncommon issues households experience with their ... Continue reading this article…

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H&R Block Online Tax Filing Review

by Flexo
hrblocka

This is a relatively long review of H&R Block’s online tax preparation and filing service. H&R Block has provided Consumerism Commentary with six coupon codes for H&R Block Premium Edition, the most complete service offered by the company. If you haven’t filed your household’s tax return yet, chances are taxes are on your mind. If ... Continue reading this article…

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