5 Tips to Maximize Your Tax Refund
No one looks forward to preparing and filing taxes, but a refund check is definitely something to look forward to. This tax season don’t leave money on the table that could make your refund even bigger. It’s true that tax law can be complicated, but with the right preparation and planning, you can maximize your refund. Here are five tips to maximize your tax refund
1. Revisit your filing status
While 96% of married taxpayers file a joint return every year, it isn’t always the best strategy for getting the biggest refund. There is another option for married filers called “Married Filing Separately.” The IRS uses adjusted gross income (or AGI) to decide if certain deductions can be claimed. If each spouse files separately, the IRS takes individual deductions like COBRA payments and medical expenses into account.
On the other side of the coin, spouses who file separate returns may forgo other deductions that apply only to joint filers. The best course of action? Calculate your taxes with both scenarios (filing jointly and separately). Yes, it will require extra time and effort, but the payoff of knowing which filing status to choose is well worth it.
Single filers can benefit from the larger standard deduction afforded to Head of Household filers if they pay more than half of the household expenses. Another little-known fact is that any individual who acts as the financial guardian or caregiver to an elderly parent can claim Head of Household status–even if the parent doesn’t reside with you. As long as you provide 50% or more of the financial support to your parent, you qualify.
2. Make the most of deductions
You might know some of the common deductions like charitable contributions or student loan interest, but did you know that you can deduct the cost of the miles you drove to volunteer for that charity? Or that you can deduct work-related education expenses? With a little research, you can find deductions for everything from home office square footage to relocation expenses.
To ensure that you claim the proper amount and don’t suffer undue scrutiny from the IRS, keep accurate records of each deduction. Track the miles you drive for charity work. Keep every donation receipt. Diligent record keeping will make tax preparation much simpler and much more rewarding when your refund check arrives.
While you can take the standard deduction (and if you don’t have a lot of itemizable expenses, you probably should), calculate both scenarios before filing to determine which path will lead to the biggest reduction in tax liability.
3. Put retirement savings to work
If you haven’t been saving for retirement in a traditional IRA– don’t despair. You have until the April 15th filing deadline to contribute to an IRA for the previous tax year. What does this mean for your refund? It can drastically reduce the amount of your taxable income, further increasing your refund. If possible, deposit the maximum contribution. Note: Roth IRA contributions aren’t eligible for a deduction like a traditional IRA, but you can still get the “Saver’s Credit” with your Roth IRA.
If you have a Health Savings Account (HSA), you can make after-tax contributions to it between now and April 15th. While you will have already paid taxes on the money you use for the contributions, the resulting reduction in taxable income can make a difference to your refund.
4. Look for credits
A tax credit equates to a matching subtraction from the amount you owe to the IRS. In other words, if you owed $10,000 in taxes and claimed a credit worth $5,000, your bill would be automatically reduced to $5,000.
The most common credits are the Dependent Care Credit and Child Tax Credits. This offers a reduction in liability for the cost of dependent care and support. The Earned Income Tax Credit is another common credit that working families are eligible to receive. Compare your income to the income guidelines to see if you qualify.
There are many credits available for education expenses, energy efficient appliance and home improvement purchases, and even insurance credits for purchasing coverage through the federal health care exchange.
5. Consult a professional
If your tax return is simple, you may be able to complete your return using tax preparation software, which you can often get a low cost through your employer.
Is your tax return a bit more complex? If you’re unsure which deductions and credits you can claim a qualified tax professional can help you navigate your tax return with minimal stress and the maximum refund.
Failing to pay what you owe can lead to serious consequences, including hefty fines and late fees or legal action. Failing to claim what you’re owed, on the other hand, is a waste of your hard-earned money. The boost in your refund check could pay for your investment in a tax professional.
So what do you do when you receive your refund check? You might consider using it to get a head start on next year’s tax season by investing money in your IRA. Tax preparation starts long before you receive your W2 in the mail and start gathering your shoeboxes full of receipts. Track your deductions during the months preceding tax season to get the biggest refund possible when it’s time to file.