Do You Want A Bigger Tax Refund This Year?
Many people prefer not to think about the tax they owe until tax time. Then, it becomes a frantic rush to gather all the minor details needed for filling the W2 and 1099 forms. Typically, taxpayers do not aspire to be generous when it comes to paying their taxes. They aim to pay as little as they can, or if they have paid more taxes than they needed to, try to get as big a refund as possible. Although tax time is still not due for some months, being fast off the blocks can be worthwhile.
The Tax Breaks that Taxpayers Typically Forget to Include
Doing your calculations at the last minute is not the best way for preparing your tax returns. It increases your chances of making calculation errors. Alternatively, you might miss detailing some deductions, thereby doing yourself an injustice. The most common tax breaks that people forget to capitalize on are:
– Charitable Gifts: People often include details about the monetary gifts they make to their favored charities. What they forget to include is the list of expenses incurred while doing charitable work. This includes aspects like:
- Buying supplies for a charitable group
- The expenses incurred in purchasing and cleaning a uniform, if applicable (if you work as a youth group leader or volunteer at a hospital)
- Travel expenses incurred for using your vehicle for charitable purposes
– Mortgage Refinance Points: When people purchase a house, they deduct the points paid on the loan for the year of purchase. However, if you use refinanced mortgage funds for improving your primary residence, you could deduct these points as well.
– Child Care Credit: Parents often claim the child and dependent care credit for covering the costs of afterschool daycare. This is a time when the parents are typically at work. However, they often discount the tax break applicable to summer day camp expenses. These camps supervise the child during the day, while the parents work. Hence, parents can claim this as a legitimate tax break. Note however, that parents cannot include overnight camp expenses in this situation.
– Educational Expenses: People wanting to advance their studying can avail an assortment of tax breaks provided by the Internal Revenue Code. Usually, the deduction on tuition and fees could wipe away about $4,000 from your taxable income.
– Job Seeking Expenses: Employed individuals can deduct moving expenses when they relocate to take up another job. However, they can also deduct expenses incurred in looking for a new job. This is valid even if they have a job at present. The list of expenses include fees for preparing resumes, fees levied by placement agencies etc. To claim this break, people need to ensure that their miscellaneous itemized expenses exceed two percent of their adjusted gross income.
Top Tips for Getting a Big Tax Refund
If you enjoy getting a tax refund check in the mail, here is a list of tips for getting a bigger tax refund in the coming year.
- Revisit Your Filing Status: Several married couples file their returns jointly. However, this might not be a wise strategy. For example, the IRS determines whether to allow or disallow certain expenses (e.g. medical expenses), by using a percentage of your Adjusted Gross Income (AGI). By filing your returns with a “Married Filing Separately” status, you and your spouse could get lower AGIs. This could be useful if one spouse has higher medical expenses. However, filing separate returns could result in a loss of credits too. Therefore, always compute your taxes under both scenarios. Use this for maximizing your refund potential.
- Maintain Meticulous Details of Your Expenses and Deductions: As mentioned earlier, people often forget to claim their legitimate tax breaks. Some of the tax breaks listed above could boost your tax refund considerably. However, you need to have precise records of trip logs and receipts for supporting your claims.
- Maximize Your Contributions to Your IRAs: Contributing to any kind of retirement accounts i.e. traditional or Roth IRAs is beneficial. It yields a tax saving of 50 percent of the first $2,000 deposited in these accounts. Taxpayers can open traditional IRAs until April 15 for the previous tax year. Therefore, they can reduce their taxable incomes by maximizing their IRA contributions. People over 50 years of age can capitalize on the catch-up provision too. If you contribute to a Roth IRA, you can also claim the credit on your retirement savings contribution.
- Get Your Timing Right: Every year has a rollover period, which you could take advantage of. For example, many taxpayers pay their mortgages each month. Consider paying your installment for January before December 31. This could help you could utilize the added interest for your mortgage interest deduction. Similarly, consider paying your property taxes before the year-end. It could be the difference between taking an itemized deduction and taking the standard deduction. Self-employed people must pay their fourth-quarter state estimated taxes in December instead of January. This increases their itemized potential. Similarly, consider delaying your year-end bonus payment until January 2015, if your company permits. It might be useful if you expect to be in a lower – or the same – tax bracket the following year.
- Consider Utilizing Your Tax Credits: A tax credit equates to a dollar. By using your tax credits, you could reduce your taxable income. The most common tax credits include the Earned Income Tax Credit, the Child Tax Credit, the Child and Dependent Care Credit etc. Some tax credits are refundable as well. This means that you could claim them even if you don’t have any tax liability.
- Get Professional Help: Mobile apps have made it easier to calculate your taxes and file your returns. However, you could also get help from tax professionals. These individuals are more knowledgeable about tax credits, filing status details and deductions. As a result, they could help you get a refund of about a thousand dollars, if not more. Their fees are not extravagant either and range from $100 – $500.
- Increase the Amount of Money Withheld from Your Paycheck: Withholding denotes the amount of taxes deducted from your paycheck toward federal and state taxes. Consider claiming fewer withholding allowances when you fill your Form W-4 (the Employee’s Withholding Allowance Certificate). This will result in your employer withholding more money for federal taxes.
- Manage Your Investments Prudently: If you invest in stocks, you can deduct losses on the sale of stock as capital losses. These losses can offset capital gains in addition to about $3,000 of a person’s ordinary income. To maximize this further, ensure that the stock meets the requirements expected of a Section 1244 stock. If a Section 1244 stock fails, you can deduct as much as $50,000 for a single return. Similarly, consider deducting your worthless securities as losses. You can file a refund claim after seven years from the year in which the security became worthless. Therefore, if you invested in a security that became worthless in 2007 or later, you could file a refund claim prior to April 15, 2015.
By adopting these strategies, you could get a bigger tax refund. However, a tax refund is nothing more than getting your own money back. In short, you could have avoided depositing excess tax and used the money for some other purposes.
Consider that tax returns are due on April 15. The IRS has 45 days from this deadline (and not from the date on which you file your return) to process your refund. The IRS will only pay interest on the refundable amount once the 45-day deadline lapses. For returns filed after the April 15 deadline, the IRS has 45 days from the date you filed your return for processing your refund. Therefore, in many cases, you might not get any interest on your tax refund either.
Depositing excess tax makes sense when you are unsure of how much tax you owe. While you could get professional help for filing your returns, situations could arise where you omit certain earnings or other details. Therefore, safeguard yourself from unpleasant tax surprises by depositing a little more tax than you owe. You could be discounting yourself by depositing excess amounts of tax. That too, when you might not get much interest in return, if at all.
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