Well, it's early April, and those pesky tax-filing deadlines are upon us. You're not ready, you say? You want to file an extension now so you can file your return in October? Then there are a few things you need to know.
If the reason you need or want an extension is that you really didn't want to deal with your taxes in the past three months, then you may want to change your thinking a little, and here's why.
If you are on extension in Hawaii and you ultimately find out that you need to pay more, the state's computer will check to see if you paid in 90 percent of the tax by April 20. If you didn't, the computer will take away your extension retroactively. And it will probably hit you with 25 percent penalties and interest on top of that.
If you want the computer's action undone, you first need to find a Tax Department person to talk to, then you need to prove to that person that you paid in your properly estimated tax liability before April 20. "I didn't want to deal with it" and "Well, I was missing a K-1 or two, so I just put zeroes in for those" aren't good ways of proving properly estimated tax liability. You need to show that you put in the effort to figure out what you owed, and that you paid in the amount you estimated by the due date of the return. For federal tax, the procedure is different but the principle is the same - tax liability must be properly estimated or bad things can happen.
You need to be especially careful in the first year you're doing business either by yourself or in a partnership. Why? If you're an employee, there are Social Security and Medicare taxes taken out of your pay. The employer pays half and you pay half. But if you're self-employed or in a partnership, there's no employer to pay the second half, so you pay both halves. That could come as a shock if you didn't know it was coming.
And speaking of Medicare taxes, there are new Medicare taxes on wages above a certain level ($200,000 single, $250,000 joint) and there are Medicare taxes on passive income once your household income reaches a certain level ($200,000 single, $250,000 joint). These took effect in 2013. So, if your estimated tax calculations didn't consider these items and you have the income, you really should do the extension calculations right.
But why should I just tell you the bad news? What if, on the other hand, it turned out you had a fat refund coming? Then the government won't be penalizing you. Good news, right? Good for the government since you gave them an interest-free loan for such a long time. And, by the way, couldn't you have used that cash?
In any event, the moral of the story is that you need to at least take a look at your taxes in early April, if not before. If you have money coming back, consider getting that return in. If you think you're going to owe, you need to write a check when you send in the extension application. Don't get caught in the traps that come with filing an extension blindly.
* Tom Yamachika is the interim president of the Tax Foundation of Hawaii.