When tax season rolls around, most taxpayers are looking for ways to maximize their refund or limit their overall tax liability. While the goal is never to get a huge tax refund, as this would mean that your withholdings are out of order and you are allowing the government to use your money interest-free, getting a small amount in your return is definitely more ideal than having to pay in at the end of the year. The good news is, there are a few things that can be done before the tax year ends and during the tax return process that can allow taxpayers to get the most out of their tax refund.
Last updated: Feb. 13, 2020
Consider Your Filing Status
Filing status can affect a tax return in a variety of ways. It is the filing status that determines what the standard deduction will be, how filing will be completed, the credits that can be taken and the total tax liability that will be owed or the refund that will be received. Most people will file jointly as a married couple or single, but there are other options that can open the door for better tax credits and deductions, such as married filing separately and filing as the head of the household. A tax professional can review each tax situation to find out the best way to maximize a refund.
Consider Timing To Maximize Deductions
Before tax season begins, it is crucial to consider possible deductions that can help boost a return. Remember that everything that occurs before Dec. 31 can be used as a deduction. Taxpayers can take advantage of this window by paying a January mortgage payment before the Dec. 31 deadline to increase the mortgage interest deduction. They can also schedule any health-related treatments or appointments that need to be taken care of, having them performed before the end of the year to increase medical expense deductions.
Look Into Earned Income Tax Credit
Earned income tax credit is available for those who are low- to moderate-income earners. The credit works by decreasing the amount of tax owed based on income and the number of dependents in the household. There are other requirements that will need to be met to qualify, such as receiving income or having a qualified child who meets all the rules for you.
Don’t Forget Child Care Expense Deductions
Taxpayers who have paid expenses throughout the year for a child or dependent care will be able to deduct up to $3,000 for one qualifying dependent and $6,000 for two or more. To take advantage of the child care deduction, the dependent will need to be under the age of 13 and physically or mentally unable to care for themselves. For a dependent deduction for an adult, the dependent will need to be a spouse who is incapable of self-care. All dependents under this deduction must have a valid Social Security number and be listed as a dependent.
Be Prepared: These Are the Receipts To Keep for Doing Your Taxes
Pump Up Retirement Accounts
Another way to improve a return in future tax years is to maximize the contributions to tax-friendly retirement accounts. An extra contribution to a traditional IRA account can significantly reduce a taxpayer’s overall income. These accounts allow contributions to be made without paying taxes on the amount contributed until the money is removed after retirement. To plan for the long term, taxpayers can opt to have their weekly contributions maxed out each week, which results in overall lower income tax for the year and faster-growing savings.
Take Advantage of Available Health Savings Accounts
Taxpayers that have health insurance coverage with a high deductible may qualify for a health savings account. HSAs allow taxpayers to put in up to $3,550 for an individual and $7,100 for a family. The money put in these accounts is nontaxable, which will allow a taxpayer to reduce their taxable income for the year and also have money set aside to pay for healthcare expenses throughout the year.
Push Income Into the Following Year if Possible
Unfortunately, most individuals will not have the luxury of timing when their income arrives, but for those who may rely on withdrawals from retirement accounts, self-employment pay or bonuses, they may be able to adjust the dates they receive these payments into the following tax year. Reducing taxable income as much as possible will limit your upcoming tax liability. This can be a great option, especially for those who are expecting to have less income the next year. But in either case, it will provide the taxpayer with another year to pay taxes on that income amount. Be cautious to watch tax rates and possible tax reforms to make sure that the next year will be favorable to have additional income.
Consider Embarking On Home Improvement Projects Before the New Year
Tax credits that are often overlooked on tax returns are credits for energy-saving home improvements. Most homeowners will find a time when they need to remodel their home, and to save on utility bills, they will likely focus on more energy-efficient home improvement options. To help reduce tax liability, it is beneficial for a taxpayer to complete these improvements before the end of the tax year to take advantage of additional credits on their return. Credits can be as high as 30% of the cost of what was spent on certain qualified energy expenses.
Think About Increasing Withholdings
One of the easiest solutions is to increase your tax withholdings for the upcoming year. Paying more with each paycheck will likely be less of a shock then having to foot a large tax bill at the conclusion of the year. This can also better prepare you for possible tax law changes that can reduce your deductions and increase their tax burden. Although the 2020 W-4 has changed, there are two ways to increase withholdings. Taxpayers can file for fewer deductions on their W-4 or opt to have a specific amount withheld each week in addition to their numbered deductions.
Maximize Charitable Contributions Throughout the Year
Taxpayers who make a number of donations to a variety of qualifying charities throughout the year may not even be aware that they can qualify for deductions. While most taxpayers will record cash donations, donations of goods are often forgotten. Any type of donation to a qualified charity is eligible for a tax deduction. This can include bake sale donations as well as clothing and other property. Taxpayers should donate what they can before the end of the tax year and keep a record of the value of each of these items.
Look Into Refinancing
Taxpayers stuck in a high-interest mortgage for their current home or property may find that they can lower their tax burden and reduce their monthly payment by refinancing their current mortgage in preparation for the upcoming tax year. When a home is refinanced, the initial payments comprise a large amount of interest that can be deducted through itemized tax deductions. Recent tax law changes will allow a taxpayer to deduct the full amount of interest payments whether it is from an original mortgage or a refinance.
Take Advantage of Business Deductions
If you are a self-employed taxpayer, you will be eligible for a number of business expense deductions related to your company or home office space. Before the end of the fourth quarter is the time to consider any qualifying purchases and upgrades for your business so they can be taken as deductions. This can include a wide range of expenses, such as purchasing new equipment for a home office.
By using careful planning and paying attention to the details, maximizing your tax return is easy with a few simple tips.
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This article originally appeared on GOBankingRates.com: Get These 12 Tax Moves Done To Increase Your Tax Refund