More Good Reasons to Get a Tax Extension

Laura Saunders for the Wall St. Journal writes: As explained in the most recent Weekend Investor cover story, “Last-Minute Tax Tips,”  Uncle Sam offers a six-month filing extension to individual taxpayers who file Form 4868 by April 15. It’s not an extension to pay taxes—those are due April 15—but it gives taxpayers more time to finish their return.  This year the extension runs through Oct. 15. 

The story noted four good reasons to file for an extension: incomplete investment records; lack of a letter confirming a charitable contribution; desire to reverse a Roth IRA conversion without filing an amended return; and a busy schedule.

Ed Mendlowitz, a CPA at WithumSmith+Brown in New Brunswick, N.J., offers several more good reasons some people will want to get an extension.

• Tax litigation is pending, and reporting certain transactions might tip one’s hand to the IRS. 
• There hasn’t been time to research the cost basis of securities sold in 2012.
• You’re considering whether to open or fund a SEP IRA pension plan. An extension will give you until Oct. 15 to make the decision. For Keogh, 401(k) or Simple plans, the contribution can be made by Oct. 15—but the Keogh and 401(k) must have been set up by last Dec. 31. The Simple plan must have been set up by Sept. 30, 2012.
• You didn’t file last year’s return and fear that filing this year’s return will attract attention from the IRS. Extending the deadline allows more time to get both returns filed.
• You did an installment sale in 2012 and want to wait as long as possible in 2013 to elect out of it—because the 2012 tax rates on capital gains were much lower than the 2013 rates. People with 2012 installment-sale gains that can be carried over into 2013 might want to keep the installment sale if they expect to have 2013 losses that can shelter these gains.
• You have losses that can be carried back to prior years, and you want to see whether it makes sense to forgo the carryback and use the losses in the future.
• You want to delay elections that are required the first time a transaction is reported.
• The extension is for a gift-tax return where not all the issues are clear, such as for generation-skipping elections and spousal consents–or perhaps cost-basis information isn’t available or discount valuations aren’t complete.

One final tip: Mendlowitz advises people paying estimated taxes to include their 2013 first-quarter payment with the extension payment. If the taxpayer has underestimated the 2012 tax due on April 15, then adding the first-quarter payment can reduce the penalty on the 2012 underpayment—which is higher than the ding for underpaying the quarter’s taxes.