Filing a Tax Extension – What Traders Should Know
Updated January 2024 for the 2023 tax year.
The April 15 tax deadline is approaching, are you running out of time? Consider the benefits of filing a tax extension granting six additional months from the IRS to finish and file your tax return. The great news: the IRS automatically grants this extension if you file your request on time.
For personal tax returns (Form 1040) you must file your extension by April 15, 2024 for the 2023 tax year. If you need an extension for a partnership (Form 1065) or S-corp (Form 1120S), that needs to be filed by March 15, 2024.
BEFORE WE HIGHLIGHT MORE BENEFITS OF A TAX EXTENSION, THERE ARE SOME IMPORTANT THINGS TRADERS SHOULD KNOW:
- Extensions do not delay tax payment. If you owe taxes, these must be paid by March 15 or April 15 (depending on the type of return). Not sure how much you owe? It’s recommended you estimate the tax you owe, as best you can. Overpaying will avoid penalties – you can get a refund when you file your final tax return.
- If you are using TradeLog but haven’t finalized your reporting, you can view draft copies of the tax reports for estimation purposes. If you can’t estimate your trader taxes using TradeLog – maybe you haven’t finished your tax year data – then consider using your 1099-B or other broker reporting to estimate your taxable gains/losses. You can later finalize your reports using TradeLog.
- Failure to pay taxes owed by the deadline will result in penalties: 0.5% of the unpaid taxes, assessed monthly, up to a maximum of 25%. This increase to 1% if unpaid 10 days after the IRS issues a “Notice of Intent to Levy”. This is called a failure-to-pay penalty.
If you fail to file an extension on time and you don’t pay taxes owed, then the penalty is even higher: usually 5% of the tax owed each month until you file your taxes (failure-to-file penalty) – up to a maximum of 25%. If your return is 60 days late or more, it gets worse!
The IRS also charges interest on outstanding tax balances: compounded daily and accruing, beginning on your tax return due date (April 15 for personal returns) until your payment date. The interest rate is determined quarterly and is the federal short-term interest rate plus 3%.
Bottom line: you should pay any taxes you owe by the deadline date, even if you’re filing an extension.What if your estimated tax amount is wrong? If you overestimated, then you can file for a refund. If you underestimated, you’ll have to pay the difference. But you may not be subject to a late penalty if you filed the extension on time and paid at least 90% of your taxes owed by the due date.
- You cannot extend the Mark-to-Market election for Section 475(f). If you plan to elect Section 475(f) for ‘Trader Status’, which allows the mark-to-market accounting method, this election must be made by the original due date of the tax return for the year prior to the year for which the election becomes effective. In other words, if electing for 2024 then you need to file that election by the original deadline for your return – not the extended deadline. If you are filing for an extension on your tax return, make sure to attach your statement making the election then file this by the due date (April 15, 2024 for personal 2023 returns).
- An extension does not give extra time to fund a Traditional or Roth IRA. Any contributions to a traditional or Roth IRA are due by the April 15 deadline in 2024.
There are many benefits to filing a tax extension:
- Six additional months to finish your tax return accurately. Whether you’re doing your own taxes or hiring a professional, the extra time takes some pressure off. Some tax preparers even charge more to complete returns by the April deadline.
If you’re using TradeLog, our support department is inundated up to the April 15 deadline. However, if you have complex situations and need help we’ll be able to provide more detailed assistance for those who file an extension and contact us during the “slower” months. Just don’t procrastinate or you’ll find yourself under pressure again.
- Some tax experts believe that filing an extension reduces your risk of audit. While there are no hard stats to support this, the fact is your return should be more accurate when the preparation isn’t rushed. That accuracy likely reduces the red flags that may trigger an audit.
Using TradeLog has helped many traders prepare more accurate trader tax reporting. If you’re just starting using TradeLog, an extension will give you more time to learn the application and to use it correctly.
- Reducing late penalties. As mentioned above, failing to file an extension on time AND owing taxes will result in a higher penalty. Filing an extension reduces those penalties by deferring your filing deadline – even if you can’t pay all your taxes by the due date.
- Lower your tax bill. Additional time may allow you to explore elections and potential tax savings opportunities. For example: with your trader taxes some popular ETF/ETN options may qualify for Section 1256 tax treatment – typically with better tax results. TradeLog can help you identify and properly report those trades.
- Fund a self-employed retirement plan. While an extension does not provide more time for a Traditional or Roth IRA contribution, it does provide self-employed individuals with an extra six months to fund a SEP-IRA, one-participant 401(k), or a SIMPLE-IRA.
A SEP-IRA can be set up as late as the extended due date for the tax year. One-participant 401(k) and SIMPLE-IRA plans must be set up during the tax year, however you can fund the plan as late as your extended deadline for that tax year.
- Recharacterize your IRA Contributions. Did you know you can make a change in the treatment of a regular contribution to a Roth IRA or traditional IRA to the other type? The original contribution would be made prior to the April 15 deadline (for personal returns). However, if you file an extension you have until your extended deadline to recharacterize your contribution. If you are not sure of your eligibility for one type of IRA this allows you to contribute, then recharacterize it once you’ve finalized your return.
How to file an extension:
The IRS provides instructions about how to file an extension. Click here to view options and forms.
If you use an e-file tool, you might check what they offer. Many, like TurboTax, also offer free tax extension filing tools.
As always, we suggest you consult with your tax adviser regarding your situation. But as the clock ticks down to April 15 (or March 15 for some returns), you may find it best to focus on filing an extension now and take advantage of the extended time to do your taxes right.
Please note: This information is provided only as a general guide and is not to be taken as official IRS instructions. Cogenta Computing, Inc. does not make investment recommendations nor provide financial, tax or legal advice. You are solely responsible for your investment and tax reporting decisions. Please consult your tax advisor or accountant to discuss your specific situation.