You Can Get an Extension on Filing Your Income Tax Paperwork, but Not on Paying

Q: There is no way I am going to finish my tax return by April 15. What can I do? Is there an extension allowed for procrastinators? If so, how can I get one? Does the state also permit late filing?

--S.T.A.

A: Both the Internal Revenue Service and the state Franchise Tax Board have procedures in place to accommodate taxpayers who can’t make the April 15 filing deadline.

But there is one important fact you should know before you start rejoicing: The extension you can receive is only granted to complete the paperwork, not to pay any taxes you owe. If you believe you will owe taxes, you must make a reasonable estimate of that amount and pay it when you file the extension form.

Federal Form 4868 is available at all IRS branch offices and at many U.S. post offices. The IRS also has a toll-free publication order line at (800) 829-3676; follow the instructions to place your order. The IRS offers a free fax service for nearly 100 different tax forms. Call (703) 368-9694 and follow the instructions provided. But be warned: To take advantage of this service, you must dial from the handset or speaker phone of the fax machine at which you want to receive the form.

If you expect a refund from the state of California, you need not file an extension. You are automatically given until Aug. 15 to file your state return. If you owe tax, you must file the voucher form included in your state tax pamphlet along with an estimated tax payment.

Again, do not make the mistake of believing you don’t have to pay your taxes by April 15. You have the extra time only to complete the paperwork. If you underestimate what you owe, you could be charged a penalty as well as interest on any outstanding balance owed.

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Q: Last year, in addition to my full-time job for a large company, I started a small consulting business on the side, which generated several thousand dollars in income for me. How do I report this on my tax return? Do I have to register my business in some formal way? I do not have any employees, and this business is run strictly out of my home on my computer.

--T.N.T.

A: You should complete and file Schedule C with both your state and federal income tax returns. On this form, you will declare your income from your “sole proprietorship” and deduct against that income any business expenses you had during the year. If your enterprise in no way conflicts with local zoning and other codes, you do not need to register your business with the state or federal government. Your Social Security number is considered your “tax identification number” for the purposes of your tax filing.

And speaking of Social Security, you should know that you are liable for paying both the employer and employee shares of this tax. If your earnings on your regular job exceeded the ceiling on which the “old age pension” portion of tax is levied--it was $65,400 in 1997--you still must pay both the employer and employee portions of the Medicare tax on your consulting business revenue, a total of 2.9%. Remember, the Medicare portion of FICA is assessed on all earnings; your obligation is never satisfied.

The good news is that as a self-employed person, you may open either a Keogh, SEP-IRA or Simple IRA and set aside a portion of outside income in a tax-sheltered retirement account.

A Keogh account must be opened before the end of the calendar year, but you may open a SEP-IRA for the previous calendar year until April 15 (or later if you file for an extension) of the current year.

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Q: I retired last year and began drawing Social Security. My wife, who turns 62 this year, has continued working in our family-owned business. We expect to sell the business to our children this year, and although my wife will retire, she will not begin drawing Social Security. Our children will repay us for the business over many years in equal monthly or weekly installments.

Although my wife and I have traditionally filed joint income tax returns, we are wondering if my Social Security will be less subject to reduction or taxation if we begin filing separate tax returns and she declares the payments from our children. I expect that our combined income this year will be about $65,000.

--O.V.

A: Your plan could end up costing you more in taxes and estate planning hassles than you ever imagined. This is yet another case in which taxpayers are better off accepting the potential tax consequences of their bounty of riches than trying to creatively fashion ways to elude Uncle Sam’s outstretched hand.

For starters, you must remember that your monthly Social Security benefit is subject to reduction only on the basis of earned income. If your children’s payments to you for the business are strictly that--and not disguised remuneration for your continued work there--these funds are not considered earnings for Social Security purposes and won’t affect your payments.

However, Social Security recipients with substantial unearned incomes face taxation of their Social Security benefits under sweeping changes to the rules governing Social Security benefits approved in 1993.

And you cannot escape these taxes by filing separate income tax returns if you have lived with your spouse during any part of the tax year.

Social Security recipients filing separately and living with a spouse can still be subject to taxes on as much as 85% of their Social Security benefits.

Finally, have you considered the impact of community property laws and estate planning matters before deciding that your wife is entitled to exclusive repayment for the value of the business you sold to your children? According to our experts, your plan to avoid a few dollars in taxes each year would probably create a mess with your estate.

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Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or e-mail carla.lazzareschi@latimes.com