The stress of tax season can vary greatly depending on your circumstances. If you have straightforward taxes, you might be eager for April 15th to roll around in anticipation of a hefty refund. But, for many others, particularly those with more complex taxes, this time of year can bring a sense of dread as the filing deadline looms.
Whether you want to or not, it’s time to start thinking about taxes with the new year upon us – including whether you want to file early or wait for a tax extension. While some face the temptation of delaying the inevitable as long as possible, your choices can impact your financial well-being and your peace of mind.
This article will explore the pros and cons of filing early versus opting for an extension. And we’ll provide insights into why promptly filing might be a source of relief for some, while an extension could be a strategic move for others.
Benefits of Filing Early
Most people file their taxes early to receive their tax refund sooner. The IRS processes tax returns in the same order in which they receive them. If you have a simple return and expect a refund, it usually pays to file early to get your money back sooner.
If you think you owe money, quickly filing will tell you how much you owe sooner, giving you time to arrange your finances accordingly. You can also make more informed decisions about requesting a payment plan or borrowing money elsewhere.
Filing early also gives you plenty of time to find a good accountant. Finding a tax pro in April (especially one knowledgeable about cryptocurrencies) is difficult, as they tend to get busier and busier as the tax deadline approaches. And if you wait too long, you may struggle to find someone with the right experience on time.
And finally, early filing provides the peace of mind that comes with having your taxes done. You don’t have the stress and anxiety of a looming deadline, enabling you to focus on other, more critical aspects of your life than the IRS.
Reasons to Consider an Extension
While early filing has benefits, there are scenarios where opting for a tax extension makes more sense. Understanding these scenarios can be crucial, especially for those with complex tax situations requiring more resources – such as crypto returns.
The most common reason for a tax extension is, as you might guess, to provide more time to collect documentation. It can take time to aggregate everything in one place if you have self-employment income, multiple income streams, complex investments, or significant deductions. It’s much easier to ensure you have everything than to try and amend a return after it’s filed.
Rushing to meet a deadline can also increase the likelihood of errors on your tax return. By filing for an extension, you have time to double-check that everything looks correct and reduce the need for amendments in the future. Moreover, you have more time to maximize deductions and credits by sorting through all the available opportunities.
Of course, you may also need more time during unexpected life events, such as a family emergency or personal disruption. Or you could simply want to give yourself more time to avoid the stress of filing taxes under such a tight deadline.
Understanding Tax Extensions
Tax extensions provide additional time to file your return. Rather than an April 15th deadline, a tax extension gives you until October 15th to file your return.
Understanding that an extension to file is not an extension to pay any taxes you owe is critical. If you expect to owe taxes, you must estimate and pay these by the original April 15th deadline. Failing to do so can result in penalties and interest on the unpaid amount.
That said, if you don’t file a tax extension and are late filing your taxes, the penalty for filing late is much steeper than the penalty for paying late. The failure to file penalty is 5% of the unpaid taxes for each month or part of a month the tax return is late, up to 25% of the total due. On the other hand, the failure to pay a penalty is only 0.5% of the unpaid taxes for each month.
You can file for an automatic tax extension on the IRS website using Free File or by making an estimated tax payment and indicating on the payment that it’s for an extension. Alternatively, you can file Form 4868 by mail, but this is frowned upon because it could get lost.
If you file for an extension, you must estimate your tax liability and make an estimated payment to avoid a failure-to-pay penalty. If you cannot afford the estimated payment, you can negotiate a payment plan with the IRS to pay a lesser interest rate.
How to Make the Best Choice
Whether to file taxes early or request an extension depends on your situation. Whichever option you choose, plan ahead. If you file early, gather all necessary information in advance. If you opt for an extension, use the extra time wisely and avoid procrastination.
Here are some key considerations to help you make the right choice for your specific situation:
- Financial Complexity – Early filing is an excellent option if your tax situation is straightforward (e.g., you’re a W-2 employee without significant investments or deductions). However, if you have self-employment income, multiple income sources, investments, or multiple assets, you may benefit from the extra time an extension provides.
- Readiness & Time – Consider how much time you realistically need to dedicate to preparing your taxes and whether you have the information you need to file accurately. If you’re pressed for time or lack the information you need to file, an extension could help you avoid the need to amend a return later while realizing all deductions and credits.
- Health & Stress – Evaluate how the stress of tax season affects you. If early filing alleviates stress, it might be a better choice. Conversely, if you need more time to file to avoid anxiety, consider a tax extension.
Harnessing the right people and tools to streamline your taxes is likewise critical. For example, computing cryptocurrency gains and losses can be time-consuming and error-prone if you do them by hand. But ZenLedger and similar solutions can streamline the process by automatically aggregating transactions, computing gains/losses, and generating the forms you need to file.
The Bottom Line
Efficiently navigating tax season requires informed choices that align with your personal and financial circumstances. Deciding whether to file taxes early or request an extension is essential and should be based on a thoughtful assessment of your needs and situation.
If you have straightforward taxes, early filing can deliver swift refunds and peace of mind. But, if you’re dealing with more complex financial scenarios or unexpected life circumstances, an extension can provide much-needed extra time to ensure accuracy and thoroughness in your tax preparations.
If you need help filing your crypto taxes, ZenLedger aggregates transactions across your wallets and exchanges, computes your capital gains or losses, and generates the forms you need to file.
This material has been prepared for informational purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.