Here are some tips on filing for an extension and on ways to pay your tax bill
If you don't think you can make the Apr. 15 deadline for filing 2007 taxes, you aren't alone: An estimated 10.3 million will file for an extension this tax season. Here are some tips on filing for an extension and on ways to help pay your tax bill.
Getting an Extension
If you can't complete your taxes by Apr. 15, your best bet is to file for an extension online using one of the providers noted on the IRS Web site or at TurboTax.com, which also offers online extensions free of charge (click on the Free Edition).
Filing for an extension online is a good idea because the online services can help you estimate your ultimate tax bill—and you'll need pay as much of the total as you can by Apr. 15. If you didn't move or get a new job in the past year, your 2006 tax return will serve as a good guide for estimating your 2007 taxes. But if you did experience a major financial event—maybe you bought property, sold securities, or inherited money—you'll have to spend some time crunching the numbers.
Getting an extension could cost you. Interest can start accruing if you underestimate how much you owe—and if you underpay by more than 10%, you may be subject to a penalty. "It doesn't matter what the dollar amount is, if you owe money, you've got to make a payment," says Anthony Burke, an IRS spokesman.
You won't pay a penalty if you are among the 77% of all filers who get a refund, which averages $2,400. "But it's a good idea to file as quickly as possible because you won't get your refund or the economic stimulus rebate until after you actually file your return," Burke says.
An extension will automatically give you six additional months to file your 2007 taxes. If you don't get an extension, or if you fail to file by the Oct. 15 deadline, you may have to pay a penalty equivalent to 5% of the tax due for every month, or any fraction of a month, that the return is overdue, with a maximum penalty of 25%.
The minimum penalty for any return not filed within 60 days of the due date (plus any extensions) is $100 or 100% of the tax due, whichever is less.
How to Pay for It
If you owe $10,000 or less and can pay it off within three years, you can try to set up an installment loan with the IRS. Last year, the IRS received 2.98 million installment agreements for filers with an average tax bill of $5,000, says Scott Gulbransen, a spokesman for Intuit's (INTU) TurboTax.
The IRS charges relatively low interest on installment payment agreements: The variable rate is currently 6%, down a full percentage point from last year. Also, the IRS can assess a 0.25% penalty for failure to pay in any month the installment payment is in effect. Installment plans must be for the full amount of taxes due.
You can set up an installment plan only if you have filed and paid your taxes on time for the past five years. And you'll need to deal directly with the IRS, the IRS's Burke says. The form you need is Form 9465, which requires you to note the amount you owe and your proposed monthly payment. You'll be charged a one-time fee of $52 or $105 when the IRS accepts your installment payment agreement. (The lower charge is for a direct-debit arrangement.)
Paying by Credit Card
Should you slap your tax bill on a credit card? "Absolutely not," says Bill Hardekopf, chief executive of LowCards.com. The IRS uses third-party service providers to process credit-card payments, and those providers typically charge a 2.49% fee, "which makes paying your taxes by credit card a poor financial move," Hardekopf says.
One exception Hardekopf likes is the Citi (C) CashReturns card, which offers 5% cash back for three months. "This is the one time where paying your taxes with your credit card is a good idea because you will make an extra 2.63% on the amount that you owe," Hardekopf says. Of course, to take advantage of this benefit, you'll need to pay your credit-card bill in full right away. If you don't pay it off immediately, the interest owed will offset the cash back.
But if you're putting your tax bill on a card with high interest rates and you can't pay off the balance any time soon, go the installment agreement route, which may be less taxing on your finances.