Should you file for a tax extension? These are the pros and cons

How to prepare for potential tax hikes

CPA and business analyst Dan Geltrude gives advice for potential tax increases.

It's officially time for Americans to file their taxes after the government delayed the traditional deadline by three months from April 15 to July 15.

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But if you haven't filed your taxes yet, don't worry: You can still file for an extension.

If you’re an individual, you can request an extension online by filling out Form 4868 using the IRS’s “Free File” tool. Once you file the extension, you have until Oct. 15 to file your taxes.

However, there are pros and cons to requesting an extension.

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It can give filers more time to thoroughly review their return and take advantage of all of the tax benefits, like various deductions and credits, that are available to them to help them reduce their liability.

By pushing back the filing date, you can also avoid a failure-to-file penalty — an extra 5 percent per month on the unpaid amount, which can add up to 25 percent of the tax due. If you file for an extension, you have until Oct. 15 before the penalty starts accruing.

Experts caution that filing for an extension does not mean you can delay paying the government the taxes that are owed.

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"Inability to pay is the worst reason to file an extension," Martin Cole, a tax educator and former accountant, said.

If you owe taxes to the federal government, payments are still due on July 15. The IRS offers some payment plans to individuals who are unable to pay the full amount of taxes they owe. The more you pay by July 15, the less interest and penalty charges you’ll owe later.

When you request an extension, the form requires an estimate of your tax liability. But if you underpay, you'll be charged the penalty, and if you overpay, you won't get the extra money back until after you file.

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If you file for an extension but still don't pay your taxes, the IRS could charge you a failure-to-pay penalty. It will typically charge you 0.5 percent of your unpaid taxes for each month you don't pay, up to 25 percent.

Of course, if you're expecting to receive a refund this year and you ask for an extension, you won't get that money until you've filed your return. The sooner you file, the sooner you get your refund.

The IRS has urged Americans who expect to receive money to file a refund as soon as possible.

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The good news for taxpayers who waited to file until after the original April 15 deadline? The IRS said it would pay interest on delayed refunds. Taxpayers with a refund issue date between April 15 and June 30 earn an annual interest rate of 5 percent, while refunds issued between July 1 and Sept. 30 earn an annual interest rate of 3 percent, the IRS said.

Like it charges interest when taxpayers don’t pay on time, the IRS also pays interest to taxpayers when the government issues refunds too slowly. The decision stems from a quirk in the tax code and in the way the filing deadline was extended, according to The Wall Street Journal.

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