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Should You Extend Your 2019 Tax Return?

March 10, 2020

Are you prepared for the April 15 tax deadline? If you need more time to file, consider an extension…..but be aware of certain factors.

According to the IRS, roughly 15 million taxpayers filed for an automatic six month extension last filing season (compared to about 10 million in previous years). Now that most taxpayers have digested the tax law, fewer are expected to file one this year. However, there are still valid reasons why you’d want to extend your deadline from April 15 to October 15. Here are a few.

How do you file an extension?

It’s a pretty straightforward process. You need to ask your tax advisor to file Form 4868 by April 15 and you will automatically qualify for a six-month extension from the IRS. You’ll then have until October 15, 2020 to file your return (without incurring late filing penalties).

What situations warrant an extension?

In addition to the most common reason for the filing of an extension (awaiting a tax document such as a K-1), there are a few situations where an extension may provide opportunities to reduce your 2019 tax liability. These include:

  • Medical expense deductions- If you itemize deductions in 2019, you can deduct unreimbursed medical expenses in excess of 7.5% of adjusted gross income (AGI). This threshold is expected to increase to 10% starting in 2021. Medical care, for itemized deduction purposes, is defined as “procedures and care for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body.” Medical care also includes medical, laboratory, surgical, dental, and other diagnostic and healing services. Make note that a portion of the fees paid to enter and reside in a continuing care retirement community can qualify as medical expenses for medical expense itemized deduction purposes.

    Knowing what’s considered medical care is crucial when you’re looking to qualify for the deduction. Compiling the documentation to support a medical expense deduction can be time consuming, which is why an extension can come to the rescue.

  • Business auto expenses- Do you use your vehicle for a self-employed business? If so, you can deduct either actual expenses (including depreciation expense) related to your business use or a simplified flat mileage rate prescribed by the IRS. As our blog mentions, for 2019 the flat rate is 58 cents for each mile of business travel plus the actual cost of any tolls and parking fees. As our updated blog reports, this rate decreases to 57.5 for 2020. Most find that using the flat rate is simpler. However, if you take the time to analyze your records, you might find that using the actual expense method produces a bigger deduction.

  • Like-kind exchanges- If you initiated a like-kind exchange in late 2019, an extension can provide extra time to complete it. As a reminder, Section 1031 of the tax code holds that you can defer the capital gains tax hit on transfers of real estate if you exchange it for property of a “like kind”. To qualify for a tax favored like-kind exchange, you must receive the replacement property by the earlier of:

    1. Midnight of the 180th calendar day following the date you relinquished your property, or
    2. The due date of your federal income tax return for the tax year in which you relinquished your property, including any extension.

Are there any drawbacks to filing an extension?

Make note that there are some potential pitfalls:

  1. Even if you file an extension, you still have to pay your tax liability for 2019 by April 15. If you don’t know the exact amount due, you are better off overpaying since any overpayment can be carried forward to the following year. On the contrary, if you underpay you’ll owe interest and late payment penalties on the unpaid balance.
  2. If it turns out that you’re due a refund for 2019, filing an extension will postpone it.

In addition, allowing this “chore” to hang over your head all summer might not be the best idea!

Does filing an extension increase risk of IRS audit?

This is a common misconception. There is no evidence to support the theory that an extended tax return increases your exposure to an IRS audit. An extension could actually reduce IRS audit risk if you are using the extra time to gather your records, fix errors, clear up inconsistencies, etc.

Questions on your 2019 tax return? Reach out to us at any time.

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