Like many aspects of adulthood, taxes are complicated. There are so many variables to consider before and during tax preparation that it is easy to become overwhelmed with the process. A person’s overall goal is to receive a tax refund. The federal or state government will refund excess money paid to them during the year, resulting in a tax refund. Online resources like Turbo Tax have made it easier for the everyday person to file taxes without the direct help of a tax professional, but potential tax breaks can still be missed. To help, here are five ways to maximize your tax refund.
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1. Rethink your filing status
There are five filing status options:
- Married Filing Jointly
- Married Filing Separately
- Head of Household
- Qualifying Widow(er) with Dependent Child
A person’s filing status can affect their refund size. Roughly 96% of married couples file jointly. This may not always be the best option. For instance, the Child Tax Credit is available to separately filing spouses. For 2020, the credit was $2,000 per child under 17 years old and could be claimed by a separate filer with less than $200,00 in adjusted gross income (AGI).
For a 2021 tax return prepared in 2022, the Child Tax Credit has been expanded by the American Rescue Plan. This raised the per-child credit to $3,600 or $3,000, depending on the child’s age. The credit is also refundable for 2021.
Filing separate returns can be beneficial or not. Some deductions will be lost depending on the filing status. Calculate both options to determine the best route.
Unmarried taxpayers claiming a qualifying dependent can cut their tax bills by filing head of household. Head of household often gets higher standard deductions and more favorable tax brackets. A qualifying dependent is a child you supported financially or an elderly parent you supported. If you provide over half of your parent’s financial support, you can file head of household. This applies even if your parent does not live with you.
2. Embrace tax deductions
Many tax deductions are commonly overlooked. Qualifying deductions significantly impact tax refunds. Commonly overlooked deductions include:
- State sales tax
- Reinvested dividends
- Out-of-pocket charitable contributions
- Student loan interest
- Child and dependent care
The American Rescue Plan of 2021 increases the amount of expense eligible for the credit, relaxes the credit reduction due to income levels and makes it refundable. This means you can still get credit even if you do not owe taxes.
For the tax year 2021 (taxes that you file in 2022):
- Qualifying expenses increase from $3,000 in 2020 to $8000 for one qualifying person and from $6,000 to $16,000 for two or more qualifying individuals.
- The percentage of qualifying expenses eligible for the credit increases from 35% to 50%
- The beginning of the reduction of the credit is increased from $15,000 in 2020 to $125,000 of adjusted gross income (AGI).
For the tax year 2021, the maximum amount that can be contributed to a dependent care flexible spending account and the amount of tax-free employer-provided dependent care benefits is increased from $5,000 to $10,500.
These provisions only apply to tax in the year 2021 and can improve caretaking, working parent’s returns:
- Earned Income Tax Credit (EITC)– A credit that helps low- and moderate-income families. It is supposed to help working families with children. For three or more qualifying children, the credit could total up to $6,728 for the tax year 2021. A person could receive a refund even if they don’t have any tax.
- State income tax paid on last year’s return– Money paid on state income tax returns from the previous year can be added to another state income tax, up to $10,000, and used as an itemized deduction. Deductions reduce the amount of a person’s taxable income. A standard deduction is a dollar amount that reduces the amount of income a person is taxed. A standard deduction consists of the total of the basic standard deduction and all additional standard deduction amounts for age or blindness. The standard deduction is adjusted every year for inflation and varies according to filing status, whether you are 65 or older, blind, and whether one can be claimed as a dependent. A person should itemize deductions if allowable itemized deductions are more significant than your standard deduction or if a person cannot use the standard deduction.
- Certain jury duty fees– If a person was paid while on jury duty and paid from the court, they may be required to give the court pay to the employer. If this is the case, a person can claim the amount given to the employer as an adjustment of income.
- Medical Miles– Medical miles are any qualifying unreimbursed medical expenses that exceed 7.5% of a person’s AGI (adjusted gross income).
- Charity Miles– Charity miles are fully deductible at 14 cents per mile in 2020 and 2021. Keep good records of your deductions, especially when they are no receipt. Record the date, miles, and medical/charitable purpose of each trip. The market value of your donations. Money spent to do the work.
3. Maximize IRA and HSA contributions
A person can open or contribute to a traditional IRA for the previous tax year. This offers the flexibility of claiming the credit on a return, filing early, and using your refund to open the account.
- Traditional IRA contributions can reduce taxable income. A person can take advantage of the maximum contribution. If a person is at least 50 years old, the catch-up provision can add to your IRA. A catch-up contribution is a contribution to a retirement savings plan in addition to the standard limit. This option is typically for people aged 50 and over.
- Roth IRA contributions do not give a reduction. They qualify individuals for the valuable Saver’s Credit if they meet income guidelines.
- Self-employed individuals have until October 15 to contribute to certain self-employed retirement plans, with an extension. Without an extension, the regular filing deadline is the deadline.
Pre-tax contributions to a Health Savings Account (HSA) can reduce taxable income. Requirements to open and contribute to an HSA:
- Individuals must be enrolled in a health insurance plan that has high deductibles that meet or exceed the IRS’s required amounts.
- That health insurance plan must impose the maximum annual out-of-pocket cost ceilings that meet the IRS’s limitations.
Reasons a person will be excluded from HSA include:
- Having “first-dollar” medical coverage. First Dollar Coverage is an insurance policy where the insured does not have copays or out-of-pocket expenses before coverage begins.
- Being enrolled in Medicare.
- Being claimed as a dependent on someone else’s tax return.
4. Taking advantage of dates
There are payments and contributions than can be made before the end of the year that will reduce a person’s taxable income including:
- Paying January’s mortgage payment before December 31 and getting the added interest for the mortgage interest deduction.
- Schedule health-related treatments and exams in the last quarter of the year to increase medical expense deduction potential.
- Make qualified charitable contributions.
- Self-employed individuals can look for purchases that qualify for deductions. Buying business-related items before the end of the year can help increase refunds.
- Home office owners can deduct the cost of painting the home office.
5. Become tax credit savvy
Tax credits typically increase tax refunds more than deductions because they are dollar for dollar reductions of taxes. Tax credits to keep note of include:
- An average of 20% of eligible Americans do not claim the Earned Income Tax Credit.
- The Consolidated Appropriations Act (CAA) was signed into law on December 27, 2020, as a stimulus measure to provide relief to those affected by the pandemic. For the tax year 2020, the CAA allows taxpayers to use their 2019 earned income if it was higher than their 2020 earned income when calculating the Additional Child Tax Credit (ACTC) as well as the EITC. For 2021, taxpayers can use either their 2021 or 2019 income to maximize the credit.
- College students or those supporting college students may be eligible for education credits. The American Opportunity credit is refundable for up to $1,000. The total credit is $2,500 per student and applies only to funds paid towards the first four years of qualified undergraduate higher education expenses.
- Graduate students may be eligible for the Lifetime Learning Credit. Up to 20% of a graduate student’s qualified costs up to $10,000, or a maximum of $2,000 per tax return, depending on income.
- Tax credits for energy-saving home improvement can add to one’s refund. The credit for 2020-2022 is up to 26% of the cost of qualified energy expenditures. The credit drops to 22% in 2023, then ceases.
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A big part of filing taxes is being informed. Keeping up with tax news, breaks, and changes will give you the best advantage of not paying too much in taxes and maximizing your tax refund. Consulting with tax experts will help increase your knowledge of tax preparation. Be sure to share this information with family and friends so that they are just as prepared for tax season as you are.