Ask a CPA: ‘How Do I Estimate My Taxes If I’m Filing for an Extension?’
Posted on Apr 6, 2015
In our “Ask a CPA” Q&A series, we’re ceding the floor to a certified public accountant to help address some of the trickiest tax topics out there.
Today, we pose a common conundrum—how to estimate taxes when filing for an extension—to PJ Wallin, CPA and founder of Atlas Financial in Richmond, Va.
Tax time can bring on serious stress for people—especially if your taxes are a bit more complicated than the average person’s.
In fact, you may even be one of the many Americans who need a bit more time to complete your taxes.
Of course, doing the math on how much you’ll actually owe if you’re still waiting on a few more pieces of info is easier said than done.
Here’s what to do if you’re wondering …
Why So Many People Ask This Question I think the biggest confusion about estimating taxes when filing for an extension comes from the fact that you can extend the reporting timeline but not the payment due date—which is why so many people ask this question.
Often, people file for extensions if they are waiting on a tax document from an entity, such as an S-corporation, partnership, LLC or trust.
In other instances, someone may not be sure how to report a certain transaction, and may not have access to a qualified CPA during the last few weeks of the tax season. Or some other life
occurrence may happen, like an unforeseen health issue.
What I Tell Them When in doubt, send in the extension form. There isn’t any harm in overcommunicating this to the I.R.S. or state taxing authority.
It’s important to understand that filing an extension is not a bad thing. Oftentimes, CPAs will actually give discounts to folks who are O.K. with an extension being filed.
If you use tax prep software, one of the best ways to estimate is to prepare the return up to the point of the missing information. Then, make an educated guess as to what the form you are waiting on will report.
A good starting point is to look at the prior year’s return if you’re expecting the amount to be similar. If you don’t have a point of reference from the previous year, make your estimate using the I.R.S.-provided calculator .
Then add up all of your sources of income, subtract itemized or standard deductions from known forms received, and then reduce exemption amounts per person.
If you owe taxes or are close to it, it’s also good to overestimate your extension payment so you don’t get hit with interest fees. Any overpayment amount will be refunded to you once you do finalize the actual return.
The Bottom Line By filing an extension, you are only extending the time you have to report your final income on your tax return. You still must pay any taxes owed by the April 15 personal filing deadline.Source: www.learnvest.com