Waiting To File Has Drawbacks For Taxpayers

There are even more excuses than usual for procrastinating on doing your income tax return this year.

After all, with the budget standoff between President Clinton and Congress, it still isn’t known for certain whether legislation might be passed that would change some of the rules that apply for 1995 - on capital gains, for instance.

As excuses go, this one has a lot to recommend it. It’s timely, it’s topical, it even shows off your knowledge of current events.

But financial advisers agree it still isn’t much of a good, sound reason to put off the annual wrestling match with the Internal Revenue Service forms, especially if you, like most people, expect to have a refund coming.

“Most taxpayers will gain little by waiting for the air to clear,” says Standard & Poor’s Corp. in its weekly publication The Outlook.

Congress has proposed to cut capital gains taxes on investments that are held for more than a year, as part of the sweeping budget legislation that has led to a months-long impasse between Clinton’s Democratic administration and the Republican-controlled Congress.

Many people, including mutual fund investors and investors in individual stocks and bonds, have sizable capital gains to report for 1995 as a result of the bull market on Wall Street.

Now, with less than two months before the annual mid-April filing deadline for most taxpayers, it remains uncertain whether any measure dealing with taxes is going to be passed any time soon.

Even if it is, the chances now look slim that a lower capital gains rate would be made retroactive to 1995. “I think it’s highly unlikely,” says Marc Britton, director of personal financial planning at the accounting firm of KPMG Peat Marwick.

In the event that some change is made affecting any of the rules for 1995, people who have already filed will be able to prepare an amended return, using IRS Form 1040X.

In the meantime, there is a strong incentive to file as early as possible if you have a refund coming. The longer you wait, the longer you give Uncle Sam free use of money that belongs to you, and that you might otherwise put to work by investing or using to pay down debts.

There may also be some urgency to file, S&P points out, if you have a balance due the IRS on which you may be charged penalties and interest. For most taxpayers, this worry arises if the amount paid during 1995 via withholding and estimated taxes is less than 90 percent of the year’s total tax bill, and also less than 100 percent of the tax you paid in 1994 (110 percent if your income is more than $150,000).

If you don’t have either a big refund or a sizeable balance due to contend with, and decide for any reason that you don’t want to file by mid-April, you can get an automatic four-month extension of the filing deadline simply by sending in Form 4868.

This process requires that you make a good estimate of your taxes, and pay what you expect to owe by the mid-April deadline if you want to avoid possible interest and penalty charges. As S&P notes, it can have a variety of benefits as well.

“Having a complex return done during the off-season can reduce advisory fees,” the advisory firm points out, “and extensions give you time to gather cost basis information on investments, which can be a problem, particularly with securities and mutual fund shares held a long time.”