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Taxes. Just the word brings a little shudder for most of us (at least it does for me!) We’ve all heard it: in life there are only two certainties, and, as Benjamin Franklin said, they’re death and taxes. Yikes!
But while most of us dread tax time, we’re also all hoping to make the most of our tax refund. It’s almost like a bonus when you get back something unexpected. If you’re so lucky to get a return, be sure you use your return wisely, so money continues to work for you.
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The question at tax time is always: did I do enough to ensure I get something back or at least to ensure I don’t owe and arm and a leg? Use these smart strategies throughout the year to help you maximize your refund. Even if you didn’t prepare for this year’s taxes, there are some things you can do at tax time to ensure you’re getting as much of a refund as possible.
Use a Professional
Some of us really like to DIY…even when it comes to our taxes. There are some smart software programs out there, like TurboTax and TaxAct that make it so simple it almost seems silly to pay a professional. As Dave Ramsey puts it, “If you’re young, single and don’t own a home” and if you’re very comfortable with forms, then maybe going the route of tax software is the right choice for you.
However, keep in mind, tax professionals are paid to KNOW this stuff. They understand the ever-changing nuances of tax law, deductions and withholdings, and they also know the right questions to ask. Tax software might be easy to fill out, but you may not realize there are deductions out there you could be taking advantage of. Going with itemized (individual) deductions rather than simply taking the standard deduction can help you save, as there are many deductions you might not know about that your tax preparer can help you find. In the end, hiring a tax professional is usually worth it: for a few hundred dollars or less, you can save thousands.
Always use a professional who’s been vetted and reviewed. Search for an Endorsed Local Provider if you’re unsure how to find someone reliable and ethical. When trusting someone with your money, always lean on the safe side. I should also add the caveat: ALL of these ideas to maximize your tax return should be reviewed and carried out under the watchful eye of a professional.
Increase Your Withholding
If you don’t own your own business, chances are you’ve filled out a W-4 form when you set up your payroll. Did you know those forms should be reviewed each year? Many times employees don’t think to update their withholding status as their lives change. You may have another child, your spouse may change their employment or your marital status may change. All of these factors can affect your exemptions.
In general, the fewer exemptions you claim, the larger the amount withheld from your paycheck will be. This money is paid toward your taxes and the balance at the end of the year determines your refund or the amount you owe the IRS. For a larger refund, you want to have more withheld (and thus should claim fewer exemptions).
Track Your Charitable Contributions
If you do itemized deductions rather than standardized deductions, you may be able to deduct several additional items (thus saving you more and maxing that refund). You can deduct your charitable contributions (in some cases up to 50% of your taxable income)! Donations under $250 just require a receipt to claim. If you donate between $250 and $500, you’ll need written documentation. Donations over $5000 require more detailed records.
You can also deduct expenses you may incur while doing volunteer work. Any tithing can be deducted as well as donations to churches, schools and 501(c)(3) organizations, which includes most non-profits and charities. The IRS has guidelines available on which organizations qualify as charitable entities.
Keep Track of Job Search Costs
If you’re changing employers or searching for a job, you may be able to use any costs you accrue as a deduction. This might include things like the cost of a job placement service or sending out your resume. Keep in mind: you must be searching within your current line of work. (The IRS won’t let you deduct expenses of changing your career from a nurse to a pastry chef.)
Review Your Filing Status
In most cases, you’ll save the most if you’re married by filing jointly, rather than separately. This might not be the case, however, if your spouse has defaulted student loan debt, alimony, child support, healthcare expenses or other variables. Consult with your ELP to see if you’re using the smartest status for your circumstances. If you’re single, you may be able to save by filing as head of your household.
Pay Attention to Any Family Obligations
When my husband’s mother was living with us, we were given the opportunity to be her caregivers at a time when she needed us so badly. Our daughter was just a baby at the time and while it was a learning experience and a blessing, it also opened my eyes to the financial and emotional strain caregivers can experience. Realizing many Americans are facing these same “sandwich years” with elderly parents and small children living in one home, the IRS gives deductions for caring for disabled or retired adult members in the household.
The IRS gives consideration for other familial obligations as well, including up to 35% of daycare costs, if the parent requires childcare to meet the guidelines of their employment (and falls within income regulations). There are also considerations given for alimony payments and other expenses. Of course, you also receive a tax credit for each child you have in your home under the age of 17.
Track Your Professional Expenses
If you use itemized deductions, you should track any expenses that are part of your day-to-day job, which your employer doesn’t reimburse. This can be include your cellphone, laptop, and other equipment you may have purchased on your own, but need to do your job.
You can also deduct expenses related to business meals and travel (unfortunately, not your commute, though). If you’ve joined a professional organization or if you receive subscriptions to professional journals, you can also deduct those costs, especially if you use them to stay current on your industry. You can also deduct the cost of any uniforms you might need exclusively for work.
Track Your Small Business Expenses
If you run a small business, a blog, or freelance or consult from your home, you may be able to deduct many of the expenses associated with your small business or consultancy. Even if you have a “day job” and make a little side money from home, you should still look into deducting your expenses.
Small business expenses might include your internet and phone service you use to run your business. Technology and computer equipment, as well as office supplies, are all part of making a business run from home, so save all those receipts and records! You may even be able to save on a percentage of your mortgage or rental payment based on the square footage of your home office if you use that space only to conduct your work. You may also be able to save on the same percentage of your utilities, which can certainly add up over the year.
Contribute as Much As Possible to Your IRA
If you’re investing for retirement, you may be able to make your investment work for you NOW. If your IRA isn’t covered at work, you can lower your taxable income (and thus the taxes owed) by contributing to your pre-tax IRA. The IRA contribution comes right out of your gross income (rather than your post-tax net) and by contributing the maximum amount, you’re lowering your total amount taxed. Check for the maximum contribution on the Saver’s Credit (love that name!) and use it to your advantage!
Pay Your Mortgage Wisely
You can maximize your refund by paying your January mortgage payment and property taxes in December, rather than waiting until after the first of the year. If you’ve refinanced your home within the last year, you’ll also have a greater deductable portion because your interest payments will have increased. At the beginning of your mortgage payments, you’re paying a greater amount toward interest. By refinancing, you’re essentially hitting “reset” on the mortgage process so you’ll have a greater deduction on the interest.
Be Energy Efficient
There are certain deductions for making energy-efficient upgrades and updates to your home. Coincidentally, many of the energy efficient upgrades are also going to help you save on your utilities! Things like new roofing, insulation, adding solar panels, and other home improvements may qualify for deductions. If you drive a hybrid vehicle, you may also qualify for energy-efficient deductions and credits.
Take Care of Yourself
It may sound strange, but by caring for yourself and using smart budget strategies, you can also save on your taxes. Simply being budget savvy and aware of your finances helps you see things coming down the road and prepare for financial strains (like saving money for taxes if you think you’ll end up owing rather than getting a refund). It also means you’ll be organized and you can easily access receipts and records you need to have on hand.
While your health insurance costs usually aren’t part of your IRS deductions (unless you run your own business, then they ARE), other health related expenses can be used as deductions. If your family has faced an accident or major health issue not fully covered by insurance, it’s worth it to consult with a professional. Putting off healthcare and preventative screenings may seem like a way to save, but many of these are covered by your HSA, pre-tax—so take advantage!
Lastly, if you’re thinking about going back to graduate school, you may qualify for the Lifetime Learning Credit. This can also help you offset the costs of your college student’s education if they’ve gone beyond their four years of qualifying for the American Opportunity Credit.
Taxes and debt shouldn’t hold you back from your goals and dreams. As you get organized and learn to prioritize and save, pretty soon tax season won’t seem quite as dreaded—and you may actually find you’re looking forward to seeing that refund add up!