Unless you have a background in accounting, chances are your experience with filing extensions is not dissimilar from getting your car’s oil changed; you know that it’s a thing that occasionally needs to happen, you know there are people who do it, but you’re not one of them, you don’t know how to do it yourself, and if you have do have to do it, you’ll just hire someone else to make sure it’s done correctly.
But if you’ve found yourself now in the position of having to file your own extension, and you’re not quite sure where to start, we have a step-by-step guide that will explain how to file one, what forms you’ll need to file, and where you can file them (with links!).
Before we dive into the process, there are a couple of important things to know:
- The term “extension” refers to an extension of time to file your tax return. It is NOT an extension of time to make your tax payments. If, after your calculations, you owe money on your 2021 tax bill, you will need to pay in at least 90% of what you owe, both to the IRS and applicable state or territorial Departments of Revenue (DOR) by the filing deadline.
- If you make quarterly estimated tax payments, the first quarter payments will also be due by the filing deadline.
- You can use estimated totals to calculate the figures you use to file an extension, but if you do end up owing, you should remember that the liability figure you’ve come up with is just that; an estimate. It is possible that you’ll owe more or less, depending on a number of events (which we will cover later) that could drastically alter a return’s prognosis from year to year.
- If you don’t have enough money to pay your calculated tax liability (or the 90% minimum), you should still file for an extension, and pay in as much as you possibly can. This will establish to the IRS and applicable DOR a good faith effort on your part to determine and pay your tax, and could possibly help in avoiding a late filing penalty if your actual tax bill ends up being higher than anticipated. The Massachusetts DOR is an exception to this; if they do not receive at least the 90% minimum, they will assess late filing penalties.
- Even if you usually get a refund, you should still file an extension. Each state does have their own rules regarding $0 balance due extensions—Massachusetts, for instance, does not accept them—so do be sure to check your state’s policy with respect to that.
Extension Form 4868
The federal extension form you’ll use to file your extension is Form 4868, which you can access here. On this form, the key lines you’ll need to know are:
- Line 4: This line refers to the total amount of your tax (before withholdings/tax payments) for 2021. You will have to provide this amount yourself, and we’ll explain how later on.
- Line 5: Enter the total amount of your federal withholding for the year, as well as the aggregate amount of tax payments you made (not including your 2020 tax bill amount) to the IRS.
- Line 6: Where you’ll enter the balance of what you owe, which is the difference between your total expected tax (Line 4 total) and what you had withheld and/or paid in estimated tax payments (Line 5 total).
- Line 7: Where you’ll enter the amount you’re going to pay towards your balance.
The Massachusetts extension form is Form M4898, and blank copies of the form can be accessed here. If you live in a state other than Massachusetts, you should be able to access the applicable state return extension form on your state’s Department of Revenue website.
Where to File
Extensions can be filed either by mail, or electronically. If you choose to mail your extension forms, you can print the forms off from the IRS and DOR websites, fill them out, and mail them, but if you owe, do make sure to include payment with the form. Also, if possible: certify your mail.
Filing extensions electronically is an option as well, regardless of whether or not you have an account with the IRS and/or DOR. This option will not require you to physically file a form, but you do need to know the amount you owe in order to make an accurate payment. For your federal extensions, once you’re on the IRS home page, you can make your extension payment by:
- Clicking on the “Make a Payment” button
- On the next page, either clicking “Pay Now with Direct Pay” or “Pay Now with Card or Digital Wallet” (this second option comes with a convenience fee)
- And then on the next page, clicking “Make Payment” once more.
- On the next page, you will be prompted to provide a reason for the payment—select “Extension”.
- From there, populate all of the relevant information in the boxes provided, and make your payment.
In order to electronically file a Massachusetts extension, visit MassTaxConnect at mtc.dor.state.ma.us/mtc/_/. Then:
- Select “File an Extension”, located in the second column, in the “Individuals” box.
- Provide the requested personal information on the next screen, then select “Make a an extension payment for 2021.”
- Click “Next”.
- Follow the instructions provided on the site.
How to File
As we mentioned before, in order to ensure you’re paying the correct amount with your extension, you will have to do some light calculations. Start by looking at your 2020 return, and determining whether or not there were any major differences in income. Consider also any major financial events that may have occurred during the year, such as:
- Sale of a property
- Capital gains distributions or transactions (increase from 2020)
- Premature withdrawals from retirement accounts (not including rollover contributions, which are non-taxable)
- Increased self-employment income
- Bonuses received
- Exercises of stock options
If any of these events occurred during 2021, it’s possible that they will have an impact on your total tax (Line 4 amount). You’ll have to account for the increased income when reconciling the amount of withholding you had, and any estimated tax payments you made throughout the year, but chances are you will have a larger balance due (Line 6 amount).
If none of these events are applicable to your tax year, and your income did not change drastically from 2020 to 2021:
- Go to Line 24 of the Form 1040 (second page of your tax return summary). The amount on this line is the total tax assessed on your income in 2020.
- Do the same for your state return (for Massachusetts this is Line 37).
- Add up your 2021 income and federal withholding.
- If the figures from 2021 look comparable to your 2020 figures, you can estimate whether or not you owe based on the result of 2020 federal and state returns (tax due or balance due).
- If you generally pay estimates, you can either pay the same amount as you did in the first quarter of 2020, or slightly more.
Remember: even if you usually receive a refund, or have a balance due of $0, you should still file an extension. The only exception is Massachusetts filers, as the state does not allow the filing of $0 due return extensions.
If your income did increase dramatically for one of the above-mentioned reasons, then unfortunately your extension is likely going to require some additional calculations in order for your estimated balance due figure (Line 6 amount) to more accurately reflect the actual figure. While the IRS applies different tax rates to different buckets of income (wages are taxed differently than capital gains distributions, etc.), if you’re pressed for time and not mathematically inclined, our best advice in this situation is to:
- Look at the 2 Year Comparison in your 2020 tax return.
- Find the “Marginal Tax Rate” at the bottom of the page.
- Tally your 2021 income, withholdings, and payments made, and then compare them to your 2020 amounts.
- If your 2021 income exceeds $250k, assume the income in excess of the $250k is going to be taxed at the “Marginal Tax Rate”.
- Calculate your balance accordingly.
This is the quick-and-dirty approach to calculating your balance due (if you owe). The IRS does provide a number of free resources that can assist you with calculating a more accurate balance due figure, if you’d prefer to go that route. If you’re determined to calculate the number on your own, here are some important things to keep in mind:
- Ordinary income—wages, interest, net rental income, unemployment, and 85% of social security income—are taxed at graduated rates that depend on how much you earned. These rates change every few years (both at the federal and state levels) but you can view the most up-to-date federal brackets here.
- Investment income—capital gains, capital gains distributions, qualifying dividends—are taxed at a rate of 15-20%.
- There is a net investment income tax rate of 3.8% that is applied to the amount of income that exceeds certain filing-based income thresholds for total income—the aggregate of all buckets. Those thresholds are:
- $200,000 for single filers
- $250,000 for joint filers
- $125,000 for married filers filing as single
- $200,000 for heads of household
- And $250,000 for qualifying widow(er)s
- Self-employment income is subject to a tax rate of 15.3% if under the social security limit ($142,800), and 3.8% if your earnings are over that limit.
- There is a capital gains exclusion of up to $500,000 for married filers ($250,000 for single filers) if you sell your personal residence. In order to qualify for it, though, you must have resided in the home for two of the last five years (730 days).
This is by no means an all-inclusive list, and we’d never advise to treat it as such. The tax code is intricate, and complicated, and if you’ve had a significant increase in income, the first and last advice we’d offer would be to seek professional consultation to ensure you don’t run into trouble with the IRS or DOR. But if you’re in the position of having to file your own extension, this list will hopefully help as a resource.