If you’re among the millions who requested an extension this year, follow these steps to minimize costs, maximize deductions, and avoid costly mistakes as the October filing deadline approaches.
Double-check your return for opportunities that could save you thousands of dollars and prevent errors.
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1. Pay estimated taxes to reduce penalties
You may accrue penalties and interest if you haven’t paid your entire tax liability by the original April deadline. The IRS charges a failure-to-pay penalty of 0.5% per month on unpaid taxes, up to 25% of the unpaid amount, plus interest.
Making an estimated payment now can stop these penalties from growing larger. Even a partial payment may reduce the balance on which penalties are calculated.
The IRS offers online payment options that make this process quick and straightforward, allowing you to minimize the financial impact of your extension.
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2. Maximize retirement contributions
One significant advantage of filing with an extension is the extra time to make retirement contributions that can reduce your taxable income for the previous tax year.
You can still contribute to certain retirement accounts like SEP IRAs, solo 401(k)s, and SIMPLE IRAs for the previous tax year until your extended filing deadline.
This strategy can potentially reduce self-employed individuals’ taxable income by tens of thousands of dollars. Check with your financial advisor about contribution limits and eligibility based on your situation.
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3. Review last year’s return for missed opportunities
Take time to thoroughly compare your previous year’s tax return with your current draft. Many taxpayers overlook deductions or credits they’ve claimed before.
Look specifically for inconsistencies in itemized deductions, business expenses, or credits that appeared on previous returns but might be missing from your current preparation.
Tax laws change, but this review often reveals legitimate deductions you may have forgotten to include. This simple review can sometimes uncover hundreds or even thousands in tax savings.
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4. Document often-overlooked deductions
The extra time an extension provides allows you to thoroughly document deductions that many taxpayers miss, such as charitable contributions, medical expenses exceeding 7.5% of your adjusted gross income, and state sales taxes.
Don’t forget about smaller deductions that add up, like professional subscription services, continuing education costs, and home office expenses if you’re self-employed.
Take time to check bank and credit card statements for these expenses. Even small deductions of a few hundred dollars can add up to significant tax savings.
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5. Consider amending previous returns
If you discover you’ve missed significant deductions or credits in previous years while preparing your current return, you may still have time to file amended returns.
The IRS generally allows taxpayers to amend returns from the past three tax years. This strategy can be particularly valuable if you discover tax benefits you’ve consistently missed, such as education credits, home office deductions, or business expenses.
Amending multiple years of returns can sometimes result in thousands of dollars in refunds.
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6. Seek professional help for complex situations
Professional assistance may be worth the cost if your tax situation involves complicated elements like investment losses, rental properties, cryptocurrency transactions, or business deductions.
A tax professional can often identify deductions and strategies you might miss. While their services typically cost several hundred dollars, the tax savings they uncover can far exceed this investment.
Additionally, professional guidance reduces your audit risk and provides representation if questions arise later.
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7. Plan for next year while filing this year
Use the extension period to implement tax planning strategies for the current year, potentially saving money on next year’s taxes.
While preparing your extended return, identify opportunities to adjust withholding, increase retirement contributions, or time income and deductions more strategically for the current tax year.
This forward-looking approach can help you avoid needing an extension next year and may reduce your overall tax burden. Small adjustments now can lead to significant tax savings next filing season.
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Smart planning pays dividends
Taking full advantage of your tax extension period isn’t just about meeting a deadline—it’s about using this time strategically to ensure you’re not leaving money on the table.
By implementing these strategies, you can transform what might feel like a stressful extension period into a valuable opportunity to optimize your tax situation.
Remember that tax laws change frequently, so strategies that worked in previous years might need adjustment. If your situation is complex, consider consulting with a tax professional, as the savings may likely outweigh the cost of their expertise.
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