Originally published on Forbes.com.
Some people are under the impression that if you don’t get your return filed by April 15, a team of IRS commandos will be shortly surrounding your house telling you to come out with your hands up. Of course the stakes are much lower than that. By filing Form 4868 (Application for Automatic Extension), you will stave off the SWAT team until after Columbus Day. And in reality the consequences of untimely filing, can be quite trivial. Late file and late pay penalties, like interest, are based on the balance due, so, in reality, being a day late might not cost anything even if you are a dollar short.
So if you are having a busy day, should you just blow off filing an extension as long as you will be filing a refund or low balance due return in the next couple of weeks ? Well, there is something you need to consider before you get blasé about it. Elections.
Elections ? But I’m Not Running For Anything
I’m not talking about running for things. Elections are choices you get to make about the principles that will govern your return. You probably don’t have quite as much flexibility as when you are ordering a Whopper
Investment Interest
If you borrow money to buy investments, the interest is deductible but only to the extent of your “investment income”. “Investment income”, for this purpose, does not include favorably taxed long term capital gains and dividends. Non-deductible investment interest is carried forward indefinitely. People, whose only investment income is long term gain and dividends can end up with a very large carryforward, that just keeps building. You are, however, allowed to elect to treat some or all of your capital gains and dividends as ordinary. You give up the rate advantage, but get to deduct the investment interest.
Installment Sale
If you sell a capital asset on the installment method, you will generally recognize gain as you collect the principal. Why would you want to do it any differently ? Well, capital gains rates are lower for income recognized in 2012 than for income recognized in later years. The lower tax you end up with may offset the disadvantage of having to pay earlier. You can elect out of the installment method.
Net Operating Loss
If you have a really bad year, you might end up with a net operating loss that can be carried to other years. The general rule is that you carry it back two years and if there is anything left start carrying it forward. You are, however, allowed to elect to forego the carryback. That might be a better deal for some people.
What Do These Elections Have In Common ?
What these three elections have in common, along with a lot more, is that they must be made by the due date of the return to which they apply. The due date includes extensions. This is what makes Form 4868 so important even for people who do not have to worry about penalties. There are ways to get relief for late elections, but it is a lot more trouble than filing an extension.
The Biggest Gotcha
I’ve never seen this happen to somebody, but it is the type of thing I have nightmares about. If you do a deferred like-kind exchange, you have 45 days to identify a replacement property and 180 days to acquire it, but you don’t always have 180 days. You have the lesser of 180 days or till the due date of your return including extensions. So that means if you did your deal in December you only have till April 15 to close on your replacement property unless you file an extension.
So unless your life is very simple, don’t blow off filing that extension.
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