This May Be The Year To Think ExtensionStuart Weiss
Promises, promises. You liquidated a big chunk of your portfolio in 1995 because your congressman promised there would be a capital-gains tax cut retroactive to Jan. 1, 1995. Here it is February, 1996, and there's still no budget deal.
If you're still hoping to get a tax break for 1995, should you put aside your tax return until there's an agreement in Washington and perhaps file an extension beyond Apr. 15? After all, the current version of the congressional tax proposal still promises that a capital-gains tax cut will be retroactive to Jan. 1, 1995. Or should you file now and then amend your return if and when the law changes?
If you file now, you will pay according to the current law--28% on capital gains. If the law is changed retroactively, you would file a Form 1040X to amend it, refiguring your tax under the new rules. You can either request a refund check or apply the tax savings to your 1996 tax year. Actually, you have three years from the date of your original return to file an amended tax return.
Typically, the only advantage to filing sooner rather than later is if the government owes you money. True, it's nice to get that dreaded task over and done with, so you don't drag out the tax season until Labor Day. You would be filing an amended return if and only if Congress comes through with a retroactive change. The big drawback is that you must pay a higher amount of tax up front based on the current law. And if you're paying for an accountant's time, filing and amending is more time-consuming and costly than extending.
BUYING TIME. In contrast, filing an extension is a snap. Using a postcard-size 4868 form, you can get an automatic extension of up to four months. A second extension can be obtained for another two months, until Oct. 15, if need be. But be warned: Filing an extension does not mean dragging out the time before paying Uncle Sam. Instead of figuring your tax to the penny, you are allowed to simply estimate your tax due and pay it with your Form 4868. Of course, if Congress doesn't come through as you had hoped, then your estimated payment had better be close to your actual tax due. If your estimate is at least 90%, you will pay an interest charge figured at an annual rate of 9% on the balance due. If your estimate is too low, tack on an additional 0.5% per month penalty. Interest and penalty charges are not tax deductible.
Even if you're not planning on a capital-gains tax cut, filing an extension has its charms. For one thing, it gives you more time to get your tax records together. This can be important if you have lots of capital-gains transactions requiring you to hunt for the cost basis of the securities. If you have redeemed mutual-fund shares during 1995, it can take a long time to collect cost records, particularly if you have owned the fund for many years.
In addition, many investors in limited partnerships do not receive their K-1 forms, which report 1995 earnings, until late March. Self-employed people can use an extension to give them extra time to fund a retirement plan. You have until the date you actually file to make your 1995 contribution. Finally, if you're the type who needs a lot of hand-holding from your accountant, you're more likely to get it in the summer than during the busy season.
Last year, President Clinton waited until the first week in April to sign a law that extended health-insurance deductions for self-employed individuals. The law was retroactive to 1994, which means that anyone who filed a return prior to Clinton's action would have had to file an amended return in order to receive the deduction. For many taxpayers, the extra accounting fees were not worth the additional tax benefit.
DON'T OVERPAY. This year, another law that's up in the air is whether tuition reimbursement from employers is still excludable from income. Because that provision has not yet officially been extended, the W-2 from your employer will reflect those reimbursements. But if you received a tuition reimbursement last year, you might want to request an extension so you don't overpay now and then have to amend your return later.
All of this uncertainty has many accountants, as well as their clients, in a tizzy. "We've got loaded up on our computer system all the tax forms and calculations as the law stands now," says James Vonachen, a tax partner with Clifton, Gunderson & Co. in Denver. "How in the world are people supposed to do their tax returns when the forms might not reflect the law?" The simple answer: When in doubt, file an extension and let things sort themselves out.