10 ways you can increase your tax refund this year
10 ways you can increase your tax refund this year
Taxes are the one thing we all universally dislike paying. This is why it pays to know every tax break that you can take advantage of to maximize the amount of refund you get. Tax breaks are legal ways in which you can reduce the amount of tax you will pay. They include such things as dependent care credits, mortgage refinancing points, and charitable donations.
Tax refunds are an amazing way to boost your bank balance and these days you can even plan around how much you expect back. They are like getting change back from the government. This is thanks to this nifty tool from the IRS here. This feeling dims a little if you do not get a good amount back from the government. This could be simply because you are not taking advantage of every “leniency” offered by the government to legally claim money from taxes.
To try and remedy this, we have come up with simple ways you can maximize the chuck of funds you get back every year from you taxes. They include:
- Taking advantage of withholdings
When you started your job, you must have filled a W-4 tax form from the IRS. It looks something like this. It tells the tax man just how much money can be withheld from your income every month. Your employer then takes this money and pays it to the IRS with each pay period. The mathematics for your withholding tax depend on the number of exemptions you claim. The more you claim in exemptions, the less they withhold from your money.
To increase the amount of money you get as a refund, you need to look at the number of exemptions on your W-4 form. The goal is to reduce the number of exemptions you have claimed on your form. Although sometimes different companies may follow their own internal processes, changing your W-4 information is something you can do anytime with your HR.
If you need help determining what size exemptions to claim, you can use the withholding calculator from the IRS here.
- Know your status
The status you used to file your taxes does affect the amount of money that you get back in refunds. Your household status could be head of household, single, or married (whether filing jointly or separately), among others. The goal here is to pick the status which most maximizes the chance of getting a refund.
A lot of taxpayers lose out on savings because of filing their status erroneously. For instance, if you are a single parent, filing as “head of household” instead of single can change the amount you get in refunds. This applies whether you have children or taking care of a dependent. As long as they spend six months out of the year in your home. Head of household gets about $18, 350 in deductions while an individual gets only about $12,200.
- Charity does begin at home
Giving is indeed the gift that keeps on giving. Donations made to charitable organizations can be deducted from your taxable income. This in turn increases the amount you get in your refund check. What most people do not know is that you can deduct more than your direct cash donations. The monetary value of physical donations can also be a tax deduction. This includes items such as clothes, electronics, art, and even the amount of gas used when you volunteer.
If you can prove the amount of time you spend as a volunteer, you can deduct the value of that as well. The cost of material you used during your time counts as well. This includes items such as uniforms, cleaning supplies, and even food.
- Count the kids
Yes, your bundle/s of joy are good for more than crayon marks on the wall. They are tax break. Previously, you could claim both personal exemption and child tax credit. However after the Tax Cuts and Jobs Act of 2017, you can no longer claim personal exemption, which was about $4,050 for each parent and child.
The amount of tax credit did however double from $1,000 which is great news. This is because, being refundable credit and not an actual deduction, this is removed from your final tax bill. This gives it more value than a personal exemption.
It is important to note that this is only good until the child is 16 years of age, upon which the tax credit changes to $500 until they get to 23 years of age. The $500 credit also covers full-time students and elderly dependents.
- Your IRA contributions
Saving for retirement not only helps you keep that dream of golfing at 9 in the morning alive, but also helps with taxes. Any money you put into your Individual Retirement Account lowers the amount of your money that is taxable. This in turn means you owe the government less in taxes, which culminates in a greater refund.
The catch is that you make sure you have put in your contribution in time for it to count. For the year 2020, you can deduct a maximum of $6000 if you are younger than 50, and $7000 if you are older in IRA contributions.
- Tax planning pays
Tax planning is the best way to make sure you take advantage of all the tax breaks that are available to you. This because it takes into account how much money you expect to earn in that year and what your projected expenses will be. It happens at the beginning of the year, so you know how your income and expenses will affect how much you owe in taxes.
Working with a tax expert will help you find out what you can shave, and how much, in order to lower the amount of tax you pay every month. This is by far the best expense you will make for that financial year. Enlisting the services of a tax expert also helps lower the amount of work you need to do while filing your tax returns. It is a win-win.
- Mortgage refinancing
Many homeowners refinance their loans when the rates are lower, in order to benefit from lower payments. This is also an added advantage when it comes to your tax returns. Once your home is refinanced, the majority of your first payments will go towards the interest on the loan each month.
New tax regulations however mean that you can deduct the full amount of interest on the loans, up to $750,000for married couples filing together or up to $350,000 for if you file as an individual.
- Stay green
Although the tax reforms from 2017 put limits on what you can claim as green tax credits, most of the breaks are will work, at least until 2025. The Residential Renewable Energy Tax credit allows you to claim a percentage of the total cost as a tax credit. Any project that was done before the end of 2019 could claim up to 30 percent, although that number decreased to 26 percent in 2020. The number will drop further in 2021 and you might want to talk to your tax professional about how this could affect your tax refunds.
Owning an electric car also qualifies you for a tax credit from the IRS of up to $7500. This is however dependent on the make and model of your electric vehicle, with more popular models such as the tesla getting less credit than the Chevrolet bolt in comparison.
- Dependent care counts
This includes both kids and elderly parents. The child and dependent care credit means that you can deduct certain expenses that you incur in the course of their care. This includes any money you pay someone to take care of your dependent while you are away at work. This includes children younger than 13 or children older than 13 that suffer from any impairment, whether physical or mental.
It can be tricky figuring out just how much credit you can claim, and it pays to work with a tax professional in order to maximize your benefits. It is important to note that just like a child tax credit, this is deducted from your final tax bill.
- Self-employment
Working for yourself comes with a host of benefits. For instance, you can claim expenses that allow you to operate a home-based business. This includes things like a home office, internet and telephone bills, and office supplies among others. You may need to sit with a tax consultant in order to figure out just how much you can claim, but the latest tax reforms make sense for you to go into business for yourself.