If your household is like thousands of others across the U.S., you’ve probably received a smaller than expected tax refund at some point in your life. Maybe you anticipated a refund and didn’t receive one at all. Many taxpayers count on receiving a certain amount back and work it into their tax season budgets.
When refunds fall short of their expectations, some households go into crisis mode. To minimize the possibility of this happening to you, stay on top of new tax credits and changes in tax law. If you’d like to maximize your household’s refund next tax season, consider these tips.
New Tax Deductions and Credits
Not all tax filing mistakes are related to changing regulations or new deductions and credits. Some great ways to pay less in income taxes have been around for years. For example, it’s possible to greatly reduce your taxable income by putting more money into a retirement plan. You’ll shave a large amount off your tax bill, provided you don’t make a withdrawal from your retirement account.
Medical expenses are another commonly missed tax savings opportunity. Whether or not you have medical insurance for yourself and your family, keep receipts and statements for all medical bills. Start a file at the beginning of the year to ensure you save documents for medical appointments, procedures, and travel for everyone in the family. Keep receipts for products recommended by your doctor as well.
Business Travel Expenses
If you travel for business, you might be missing out on income tax deductions. As an employee, your company may pay your business travel expenses for trips away from home. However, many taxpayers overlook opportunities to claim certain business-related items on their returns.
Keep receipts and credit card statements detailing any business expenses, even if they’re just non-reimbursed costs for short last-minute trips to meet a client. Work-related errands and travel to business functions are common expenses that can really add up over the year. Don’t miss this excellent way to reduce your tax bill.
Education Tax Deductions
Being a student may be expensive, but many education expenses are tax-deductible. You may be aware of the Hope and Lifetime Learning tax credits, but the IRS also allows many education-related deductions. Some travel and transportation expenses may be deducted. You may also deduct the costs of lab fees, tuition, textbooks, and supplies, as well as expenses related to typing or researching a paper required for your educational program.
Your education must meet certain IRS qualifications. As with all of the above advice, conduct your own research or consult with an online tax professional to ensure proper filing of your tax return. Filing an accurate, timely return while using every advantage possible will help you get the big refund you deserve. Put these tips into action and next year’s tax refund may even exceed your expectations.
Creatively Saving Your Tax Refund From Credits
There are numerous tax credits and deductions available to the person who files as an individual or head of household on their federal return. The main difference between single and head of household is based on whether or not you have a dependent (or someone else, such as a relative) that you provide significant resources for like housing and food. If so, you are a “head of household”.
There are credits for education, mostly for secondary and post-secondary education, first time home ownership, energy credits for upgrades and tons more, depending on your specific situation. Moreover, filing taxes online has become virtually free.
First, let’s clear up the difference between deductions and tax credits. A deduction is an amount subtracted from your taxable income. This can reduce your tax liability – however, for most people, a single deduction rarely amounts to much. A tax credit, on the other hand, can be very significant. Credits are subtracted from the amount of taxes you owe, generally after that calculation. They can significantly affect how much owe or get back as a refund.
There is one very unique tax credit, known as EIC or Earned Income Tax Credit. This is the only credit where it is actually possible to occasionally get back more tax than you paid in. The credit is directed at single parents but other situations of dependent care can apply, like care for a disabled parent. The theory behind this credit is that due to providing virtually everything for a person in your care, you deserve some payment for that as “earned income”. This applies to middle-to-lower income individuals and families.
After filing your taxes, suppose you find that you’re now getting a substantial refund. The prevalent idea is to take it and spend it – after all, it’s your money, right? Yes, it is. Everyone should keep some of the money just to blow – sounds like odd financial advice, doesn’t it? The best way to handle any windfall, especially money, is to not spend all of it. It’s a two-step process:
- If you don’t ‘waste’ some of the money, you may set up a regret mechanism “I could have gotten that handbag” or “I could have gotten that iPad case”. So take a reasonable amount and “waste” it.
- Use the old saying “put your hat over it”, for the rest of it. Decide on a useful purpose – if it was EIC, then put it away for your child’s college fund; if it was a credit for green energy improvements to your home, save for more home improvements. This doesn’t mean in a drawer somewhere. Get a 6-month CD at the bank for example. It’s easy, everyone qualifies for it and the early withdrawal penalty discourages you from taking it out on a whim.
If you’ve had trouble saving money, (and who hasn’t), remember this: Saving only work when it becomes a bill. When you pay the monthly bills, savings should just be another bill. It might be helpful at first to work it out as a percentage, say 5% of your take home.
This is leading up to the most important point – why give the IRS an interest-free loan on your money by letting them keep it for up to a year? A tax refund of substantial is just that – a loan to the US Treasury.
Even If you receive EIC credit, it is still yours. The answer is to change your withholding preferences on the W-4 form so that less is taken out of your check and save the money on your own. You will get interested in it – albeit, far less than it was a few years back, and you have complete control of it instead of the IRS.
9 Helpful Hints to Increase Your Tax Return
Tax season is coming up, and that means lodging your tax return. For some, this means getting some sweet, sweet tax return money, and for others, the stress of filling in forms and scrambling for receipts is at the top of the mind.
While tax season is a particularly stressful time for many, there are many people who depend on an income tax refund. Some people choose to use their return to go shopping, and others decide to save their refund money.
In either situation, it can be very disappointing to receive a lower refund than anticipated. Either way, here are some simple tips to make sure your Tax Return season goes smoothly and is relatively stress-free.
1. Be Thorough
One of the very best ways to increase your tax return is to make sure you are filing a complete, accurate tax return. All the information you include with your income tax return needs to be correct, or you might end up losing money at tax time when you could be receiving a larger refund.
Taxpayers who file their own income tax return are at risk simply because they often miss key elements of the return. If you are filing your own income taxes, try using a tax preparation website, such as 1040return.com. These websites will help ensure your accuracy and potentially increase your return. They can even help you get your Federal E-file done for the quickest return.
2. Use the Best Filing Status
If you have the option of choosing ‘married filing single’ or ‘married filing jointly’, investigate which status will be of most benefit. Usually, ‘married filing jointly’ brings the greater tax advantage due to some additional credits you can receive along with other benefits, but this is not always the case.
For instance, if there is a large disparity between the income of you and your spouse, filing jointly can actually bring your total return down. In this case, you are probably better off filing separately. If you are unsure about which is right for you, try running the numbers both ways to see what gives you the best advantage.
3. Decide How to Manage Your Deductions
Deductions are a very important tool for reducing your tax liability and increasing your income tax return. You have the option of taking the standard deduction; many taxpayers choose this option because it is very simple. Alternatively, you can itemize your deductions.
For many people, this is the more difficult, but also more beneficial course. While you will need to keep documentation proving the items you are deducting, the amount you deduct could be greater than the standard deduction.
Sales taxes and property taxes can be used as itemized deductions along with more unexpected costs like union dues, charitable donations, and even gambling losses under certain circumstances!
4. Claim Your Credits
There are many tax credits that are available and which you may qualify for. Be sure to look through the full list to determine which you are eligible for. For instance, many people are eligible for education credits or dependent care credits but never claim them.
There are also a number of more specialized credits, like an adoption credit and energy efficiency credit, that many people are unaware of. Never miss an opportunity to claim a tax credit; these credits can greatly help maximize your return!
5. Know the Rules
Each year, Congress makes adjustments to the tax code in a number of ways. The IRS posts new tax law changes on their website to keep taxpayers informed about these changes.
Make sure to read through these updates and see if any apply to your situation. Simply knowing what you are entitled to be one of the best ways to increase your return.
6. Get your dates right
There is nothing worse than being ready to lodge your tax return and then putting it off until you’ve missed the lodgment date because you’ve made a miscalculation.
Check and double-check the cut-off date for lodging your tax return, then mark it on all your calendars; that way, the deadline won’t sneak up on you. Better yet, try to get your tax return done as soon as you can so that you have more time to focus on other things.
7. Organization is key
This is really something you should have done at the end of the last financial year, but it’s never too late to start. Get an organization system going for all your receipts and financial documents. Put them all in a folder, a drawer, or even just a shoebox–whatever method you use, as long as it’s all in one place.
That way, you’ll know where everything you need to lodge your tax return is before filling out forms, which takes a little bit of the headache away. This way, you’ll also spend less time scrambling through old handbags, wallets, under the couch or through the recycling bin for rogue receipts that you need but you’ve accidentally thrown out or misplaced.
If filling out tax return forms and fishing through your finances seems like a daunting task, you could always pay someone else to do it. Good tax consultants come at a price, but can be a good trade-off for some peace of mind. H&R Block is a renowned firm of tax accountants that offer to do your tax for you or have someone help you fill out tax return forms.
9. DIY tax is your friend
For those who want to go it alone, there are always online services and software to help you do your own tax over the internet. Do some research and find a provider that gives a clear explanation of what kind of information you have to provide while you go through the tax return forms online.
Plan for the Future
Many people see their income tax refund as bonus money meant to be spent on a splurge item. Keep in mind that your refund is money you have worked hard for. There are several smart uses for a tax refund which are both more practical and beneficial to your financial situation.
1. Real Estate Investment
Property is a valuable asset even in a less than attractive real estate market. A smart use of the funds you receive from an income tax refund is investing in real estate. If you’ve already begun the process of owning a home, take steps to pay off your loans or mortgage early. For those who have yet to start the home buying process, tax refunds can be used toward the final goal of real estate ownership.
2. Debt Repayment
Credit card debt can be extremely detrimental to your financial situation. Tax refunds present an opportunity for debt repayment. You may not want to give your entire refund to your credit card company but this can save you a lot of money in interest. Also, debt repayment improves your credit rating which will make future financing and approvals easier to secure.
3. Retirement Fund
A strong retirement fund, like an IRA, is a safety net for your future. A smart use for your tax refund is to place it directly into retirement savings. This option is most practical for people who have no looming credit card debt and are comfortable with monthly living expenses.
4. Emergency Savings
Unexpected expenses like medical bills or sudden job loss can be made less stressful by having emergency funds safely tucked away in a savings account. A good emergency fund will consist of two to three months of your average living expenses. Your emergency savings can be improved by depositing a portion or all of your tax refund into the account.
5. Saving for Education
Higher education increases earning potential. Your children’s future will be much easier if you start saving for their college education early. A final smart use for your income tax refund is to place it into a high-interest savings account. Over time, the interest will add to the contributions you make and help you make sure your children can attend college.
A weekend getaway or a new wardrobe may be alluring when your tax refund arrives but there are smarter ways to use that money. Plan for the future and make practical choices when you receive your income tax refund.
When most people think about taxes, all they get it a headache. While the filing will never be a barrel full of laughs, if you take the time to carefully prepare your taxes, you will enjoy having a greater amount of money returned to you. These guidelines will give you a good place to start.
Good luck this financial year!