Ep 73: Tax Extensions: Your Secret Weapon!
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In this, we discuss the benefits of tax extensions and how to file for the extension.
They allow you to fix issues, correct errors, obtain missing tax documents, and, if you have overseas filing requirements, file them first. This may allow you to claim foreign tax credits for taxes paid overseas.
Extending tax filing does not mean extending the tax-paying deadline if you owe taxes.
Episode Links and Resources
Ep 40: Avoid These Tax Mistakes With Your Cross-Border Taxes
Stop Fearing Tax Extensions ⏳:Why Buying Time Can Actually Save You Money 💸
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Jane Mepham, CFP (00:03.158)
Do you think you need more time to file your tax return but you're worried about it? Tax extensions are not the enemy, even though people fear extensions.
Manasa Nadig, EA (00:16.882)
No, why do people fear extensions? Okay, here's what I think. I think that it might cause an audit or automatic penalties because now they think that they are filing late. And this is also something else that I hear all the time. They think that the IRS might say that they have filed a late return. Actually, none of this is right.
The IRS actually gives you a perfectly legal way to add more time to your tax filing. And you do this how? By filing a form 4868 with the IRS. And what is the 4868? It's nothing but asking for a six-month extension from the April 15th deadline to file your taxes.
And of course, if you're an expat living abroad, your tax filing deadline is June 15th. So you don't get the six months, but you do still get until October 15th to file a tax return. And it is perfectly legal, dear listener.
Some states recognize the federal extension and you don't have to file a state extension separately, but then some
States actually need you to also file an extension with their Department of Revenue. Now, this isn't only for individuals. Individuals get a six-month extension from the April 15th tax deadline to October 15th, and partnerships and S corporations get an extension to file from their deadline of March 15th to September 15th.
Some individuals who may live abroad and need even more time, they can file a second extension, which is also perfectly legal. And they get additional time until December 15th.
And that second extension is usually filed in October. And this is all up and up, gives you a lot of time to figure stuff out. And that's what we are going to talk about today.
Manasa Nadig, EA (02:43.544)
But the one key thing to remember is that you get time, you get time to file your return, but you do not get time to pay your taxes. And so this is something that is, need to remember that if you owe taxes or if you think you owe taxes, those taxes need to be calculated by April 15th or June 15th.
And you need to pay those taxes and then, the extension gives you time to file your return. So which means you need to have kind of estimated how much you would owe on your return and kind of paid a little bit, maybe sometimes a little bit higher or rounded up to the next hundred.
And then just pay something to the state and the IRS. And that's how it's done folks.
Jane Mepham, CFP (03:40.92)
And you know, I still think it's better to end up paying them a little bit more than not paying them and then have to pay an interest in something you said about the different states.
I've made a note here to put a link in the show notes showing the states that require a separate extension form versus the ones that actually go with the federal tax filing deadlines or forms. You know, yeah, you know.
Manasa Nadig, EA (04:07.225)
That'll be great, Jane. That'll be very helpful. Yeah.
Jane Mepham, CFP (04:10.174)
It'd be so nice if all states were the same, but we deal with what we got. So how can extensions help? So one, let's say you have a pretty complex situation. And when I say complex situation, you have, let's say, missing K ones, you're not sure how to tie them up, missing some cost basis, or maybe you've had a liquidity event.
Manasa Nadig, EA (04:13.848)
Mm-mm. I know.
Jane Mepham, CFP (04:39.39)
I actually spoke with somebody a few weeks ago who was actually trying to use two different software programs, and the two software programs do not agree on what the final refund is going to be.
And so they're wondering what to do. And so what I suggested to them is I think you're better off filing an extension and then get somebody to work with you on these tax returns.
And then you have business owners waiting on final financials, right? It also helps to avoid costly mistakes. Cause a lot of times when you're filing in a rash, end up missing something, you're missing a 1099 or the custodian comes back with a corrected 1099, which you see all the time. And you end up filing to amend, which it's still legal.
Manasa Nadig, EA (05:12.718)
Mm-hmm.
Jane Mepham, CFP (05:35.336)
It ends up actually slowing the process with IRS. And so you're better off extending instead of making a mistake amending chances are the person that extended is going to get their stuff sorted out sooner with IRS. And then things like, you're not sure what credits to claim, all those are really good, perfectly good reasons to actually file an extension.
Manasa Nadig, EA (05:50.982)
Mm-hmm. Mm-hmm.
Jane Mepham, CFP (06:04.864)
The other cool thing about it is that it extends the statute of limitations. So maybe I'll let Manasa explain this in a little bit. Now, if you're not sure about your filing status or
elections, this is a perfect time. Cause remember tax pros are really busy between January and April.
In fact, the joke I was making to my family, which is true, is that I don't want to talk to Manasa the whole month of April. Cause I know she won't have time to talk, right?
And there are all these different things I want her to try out for our clients. And so if you really want to play with those different things, the statuses, the different elections, the best time to do it is actually after April 15th, when everybody has been like, OK, now let's kind of get into the real planning.
It also allows for retirement contributions in specific cases, for example, solo 401k. So, for example.
Manasa Nadig, EA (06:33.634)
Yeah.
Jane Mepham, CFP (07:00.926)
I end up extending my taxes every year because I want to figure out exactly how much I can put into my solo 401k (k). By extending it, I have until the extended filing deadline to actually put the money in. So again, I'm not going to do this in a rush.
Manasa, before we jump into the other thing, could you explain briefly the Statue of Limitations and what it means when we say extensions actually extend the Statue of Limitations?
Manasa Nadig, EA (07:33.538)
You know, I think we've talked about this briefly on many different episodes. Maybe it's time we did a " What is English for? You know, so now, yeah. So listener, if you want to know what a statute of limitations is, basically, there is a statute of limitations for when you can go back and amend a return and get a refund.
Jane Mepham, CFP (07:41.548)
.Noted.
Manasa Nadig, EA (08:02.734)
From the IRS. Now, say for example, this year, April 15th, 2026 was the last year that you could amend your 2021 tax return and get a refund claim on that return because that was due on April 15th, 2022, right, for that year.
So, three tax filing periods from then would be the statute of limitations. Now, what happens is the statute of limitations, the way it works is it's three years from the tax deadline or two years from when the payment was made.
So let's say you have to make a payment on a return, then you have time for another three years.
And if you have extended, your tax return, then you have more time because the statute of limitation has now been even pushed forward. So it is kind of not easy to explain this so succinctly. Yeah. Yeah. We actually, I think we need like a
Jane Mepham, CFP (09:16.825)
We'll do an episode, Manasa, don't worry. We'll get some nice words to describe it, but that's good.
Manasa Nadig, EA (09:25.208)
Okay, not a five-page PowerPoint to kind of point things out. But the gist of it is that an extension also extends your statute of limitations, which in some cases, if you need to go back and amend some things from previous years, maybe foreign tax credits or, you know, something to do with your foreign earned income exclusion, et cetera, then having this would probably help you.
So, yeah. That's basically what that is. So coming to that, actually, in a cross-border context, an extension is even more important. Now, for example, you file taxes in another country. Now, know, Jane and I work with a lot of different clients who have a footprint in many different countries.
And some of these countries are not on the same tax year end as the U.S. is. You know, the U.S. uses a calendar-year end.
And the other country might be on a different calendar year. And for example, the UK is, you know, April 5th or April 6th or something like that. Then India is March 31st. So, their tax filing deadline is different from ours, or they may be on the same calendar year, like Canada is, but Canada's taxes are not due till April 30th.
So that return might be not ready by April 15th. So, if you have income or a footprint in more than one country, obviously it becomes even more important that you take into account all of that other income and all of the taxes that you've paid in other countries, and therefore an extension is required.
So it gives you time to file taxes in the other country and you can claim a foreign tax credit because you want to avoid double taxation and that allows you to do it. Now you also may need to file taxes in the other country because you need to claim the foreign earned income exclusion.
And then also having an extension in place talking about the foreign earned income exclusion, you may need to wait to get that 330 days that you need in order to be eligible for the foreign earned income exclusion. Those are the two big ones. Then there's the other big one, the third one, which is what? You need to file the heavy forms like we call it, the 5471s, the 8858s, which are all forms that report your business income from these other countries and if those aren't ready by the time that you have to file April 15th, you should not be rushing that.
So definitely wait for that then inheritances, if this was a year when you got an inheritance and you need to report that, having an extension in place, getting more time to file that 3520 because your inheritance crossed $100,000 always a good thing.
You know, even if everything is ready, file an extension and then mail your 3520 snail mail gets there. You haven't, you have still not beaten, you know, the, the clock, then you're in big trouble because now your 3520 is late. So you have an extension in place. It takes its time, but you know what? There's an extension in place.
So these are all the kinds of things which make extension so important in the cross-border context, Jane. And, you know, especially the foreign earned income exclusion, sometimes when you have to wait till almost December 15th to get those 330 days in.
Jane Mepham, CFP (13:37.014)
So I think basically, then what you're saying, filing extensions is a good strategy for anyone with a complex situation, but of course, especially in the cross-border context. So, it's a good way to ensure you pay who you're supposed to pay, you get what you're supposed to get, and you keep everybody happy. And so anything else?
Manasa Nadig, EA (14:00.746)
Yes, you know what, like we always say, things are getting even more complex. You know, there was the TCJA and now there is the OB3A, all have, call it OBBBA. Now these have all added more and more layers to your tax filing and therefore it is.
Manasa Nadig, EA (14:25.024)
Very important that you work with a cross-border professional, either in your tax base or your financial planning and or both if you are in that category and make extensions your friend. Please do not be worried about this. It's fine. Calculate your taxes, pay what you need to do and then wait a bit, wait for your tax advisor, talk to them in the summer and just file your return then if everything else is ready.
Jane Mepham, CFP (14:58.378)
Okay, I think we've said enough about file extensions. They are not evil. They're actually, I want to say a force for good. Well, let's just say they are good thing and with that let's conclude I'll let you do the conclusion.
Manasa Nadig, EA (15:12.374)
Yes, yes, yes, yes. Thank you, dear listener. Thank you for being here with us today and hope you found this episode useful and something that, you know, will help you think through things when it comes to crunch time.
Do visit our website, www.theimcafe.com and reach out to us and subscribe to our newsletter. We would love to hear from you. Thanks for listening. Bye.
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The speakers' views and opinions discussed in this episode should not be considered financial, tax, or legal advice. Consult your advisor for any legal, cross-border tax, and financial advice.