How to Maximize Your Tax Refund: IRS Friendly
Paying taxes isn’t pleasant unless you are getting a tax refund. There are things you can do to maximize your tax refund and avoid some of the common mistakes many people make to make sure your return is even bigger. If you fail to maximize your tax refund or make some common mistakes then you are paying more in taxes than you have to. You may also be under-reporting your income and setting yourself up for penalties and extra payments later on.
Laying the groundwork for your tax refund will require some simple tax planning, along with some researching on tax tips. Even if you are going to adjust your withholdings, you should always try to get as large a refund as possible with some popular tips to maximize your tax refund.
Don’t Leave Money on the Table
If you don’t use all the money in your Flexible Spending Account or don’t make contributions to your retirement and 539 accounts, you are then leaving money on the table. Make the most out of this. You have until December 31st each year to use money in your FSA and to contribute to your accounts.
Don’t Forget to File for a Refund
Another common way people are leaving money on the table is by not filing an income tax return at all. Just because your income doesn’t require you to file, it doesn’t mean you aren’t due for a refund. You can’t get a refund if you don’t file. If you have left any money on the table in the previous tax year, you have three years to file old returns and get your unclaimed refunds.
Retirement Accounts
Your retirement accounts are one common way that you may be leaving money on the table so it’s really important that you pay attention to them.
IRA
A common way to cut your taxes at the very last minute means making traditional IRA contributions. When you use this type of retirement account, it can lead to a reduction in your taxable income and this boosts your refund. You can make traditional IRA contributions now or after the end of the tax year, as long as the deadline of April 15th is met and you still get a tax break.
401k
In addition to traditional IRAs, 401k contributions also matter. These contributions do need to be made during the calendar year in question. Tax favored retirement accounts have the added benefit of letting you save for retirement and not have to pay any taxes on investment gains or income while the money is inside the account. This is a tax break that can add up to big savings over the long run.
Don’t Withdraw from Retirement Accounts
At the same time, you want to avoid any withdrawals from retirement accounts. When you take money out of your retirement account, it can result in unexpected taxable income. Traditional IRAs and 401k accounts offer tax-deferred growth as long as the money remains within the account. When you need your hard-earned retirement nest egg to make ends meet, you should make sure you aren’t taking the money out at the expense of your tax refund.
Claim All Deductions
Look into all the deductions that are available to you. Some common ones include medical costs, prepaid interest on mortgages, charitable donations, and some education expenses. A deduction will be subtracted from your adjusted gross income, which then reduces your actual taxable income. The taxable income is the amount you will pay on taxes so the lower it is then the less tax you will pay.
If you donate to charity and itemize your deductions then you can maximize your tax refund by taking advantage of donations in all forms. Be sure to keep receipts and good records. Ensure that you are only claiming deductions for organizations that currently have a tax-exempt status.
Claim Nonrefundable Credits
A tax deduction is a refundable credit. Refundable credits are credits or deductions subtracted from the amount of tax you owe the IRS. The IRS sees this as payment toward the tax bill. When you file a return, deductions add up to more than the amount you have already paid in taxes. When you overpay, you then get money back.
Nonrefundable tax credits can also lower the taxes you owe but stop when the amount hits zero so they can’t be used to overpay the bill. With these credits, you don’t get a refund but can still reduce the amount of your tax bill so you don’t want to ignore them. The best way to understand how these nonrefundable credits work is with an example. If you owe $1,000 that you paid via paychecks but you get a Mortgage Income Tax Credit for any amount when you file then you don’t owe more taxes but you also don’t get a refund.
Be Organized
It helps to have all of your tax documents in order. Start with the forms that are necessary for the year's filing, such as W-2 forms from all your employers and all the varieties of 1099 forms. Getting organized can help you make sure that you aren’t missing any deductions.
Don't Be Greedy
It’s easy to get so caught up in minimizing your tax liability that you start to make poor decisions. If you are shopping around for ways to maximize your tax refund and that leads you to a tax professional who uses incorrect accounting then it’s not worth the risk. It can be tempting to be aggressive with deductions too. Deductions for home offices can often be misunderstood and abused. A good practice is to always save receipts so you can support your deductions in case of an audit and make sure you actually qualify for the deduction.
Use the Best Filing Status
It can be hard to figure out your filing status and it can often be an overlooked mistake. If you use a tax preparer then be sure you are updating him or her on any life changes you have made, such as getting married or divorced. Your relationship status on December 31 will determine your filing status for the entire year.
The Head of Household status usually causes the most confusion. To be Head of Household, you must be single and have covered more than 50% of the cost of maintaining the home for yourself and dependents. If you are single and qualify then this filing status gives you a higher standard deduction than the single status and can result in a higher return.
You can pick a different filing status in order to maximize your tax refund. Even if you are married, you can calculate taxes using both the married filing jointly status and the married filing separately status to see which one leads to a higher refund. Some tax pros will even do this calculation for you.
Report All Your Income
This oversight, whether it’s intentional or not, can be costly. If you have unreported income and the IRS finds it then you have interest and penalties for unpaid taxes. It can be an honest mistake but you want to spend a few extra minutes reviewing the return to be sure you didn’t forget any income sources. It’s usually a 1099 form that can be easy to overlook. The 1099-INT and 1099-DIV forms will come from the financial institution or bank where you earn interest.
If you have chosen electronic communication then it won’t come in the mail. You will need to log into your account and make sure that you don’t have these forms. It’s helpful to keep a spreadsheet of your tax information, including your income sources, 1099s, IRA contributions, and charitable gifts, so you can make sure you aren’t missing anything. You are less likely to forget something if it was listed in the prior year’s tax information.
Pay Attention to Timing
Taxpayers who pay close attention to the calendar can also help their chances of getting a bigger refund. If you are able to pay January’s mortgage payment before the end of the year then you get the added interest for your mortgage deduction. Schedule any health-related exams and treatments in the last quarter of the year in order to boost your medical expenses deductions.
This also helps you make sure you are using all the money in your FSA. The sooner you file, the sooner you can get your refund. Building in some extra time can also allow you more time to locate any missing data and documents. The sooner you end up filing then the harder it is for identity thieves to target you as well.
Meet Deadlines
If you fail to file your return on time then you can owe interest and possibly have to pay penalties. The failure to pay penalty is pretty steep. If you fail to file and were supposed to have a refund, you still have to pay penalties. You can file an extension but an extension only extends the time you have to file. If you are going to owe taxes then you need to ensure you pay them before the deadline.
Check the Math
It seems obvious but wrong numbers and arithmetic errors are common and costly mistakes. When filling out the forms, go slowly and double-check your numbers and math. Mathematical errors are usually avoided by using tax software and tax tools that do the calculating for you. It also helps to use a tax professional. Not only will the math be correct but tax professionals also know the ins and outs of tax law and can help you to maximize your tax refund.
Use Tax Software
If you plan on doing your own taxes then you can avoid math mistakes by using tax software. Learn more about your options before you choose one and look for online reviews to see how any previous customers felt. Select the software options that fit your needs and your budget. If you can’t afford any tax software then the IRS free file system might be able to help you.
Check Spelling
Just like it’s important to check the math, it’s also important to check your spelling. If you spell your name wrong then it slows down the process of your return. Misspelled or wrong names are common for those who are newly married or who changed their names in the last year. Be sure you are using the same name on your return as on your Social Security card for easier processing.
Check the Bank Account Details
If you want to use direct deposit in order to get your refund then triple check the bank account information you give. If you enter the wrong account information then you won’t get the refund as planned. Getting things straightened out so you can get your refund can be a pain.
Sign Your Return
It can be easy to focus on preparing the return and actually filing it on time but then forget to sign it. This can also go for your tax preparer. If someone else helps prepare your taxes then double-check that he or she also has signed it.
Get Help
Tax laws can be confusing so if you have a complex tax situation and you are hoping to maximize your tax refund, work with a professional. Be sure to do your research on a professional and be skeptical of any broad claims. Someone who guarantees you the highest refund without actually knowing your individual situation might be stretching the truth.
Why Do You Get a Tax Refund?
The tax system would make a lot more sense if people just paid taxes when they became due to cover the entire year’s tax liability. However, the government withholds federal tax from every paycheck. This way, employees are effectively covering a portion of their yearly tax bill every single time they get paid.
If the withholding system were perfect then it would match your tax liability and there wouldn’t be a need for a refund. However, the government will usually withhold more than it needs to in order to make sure it covers what you owe. When this happens, the government has to pay you back and does so with a tax refund. There are a few reasons why the government has made the decision to make taxes work like this.
This Tax System Gives the Government Constant Source of Money
First, the government doesn’t want to have to wait until April 15 in order to collect taxes on the income paid in a given year. Instead, the current system allows government officials to have a relatively constant stream of tax revenue that comes in throughout the year. This allows the government to have the resources it needs to pay contractors, employees, and other parties with the money it brings in through taxes.
Government Doesn’t Believe Everyone Is Disciplined to Save Up
The government also believes that many people don’t have the financial discipline to save up over the year in order to pay a huge tax bill when it’s due. People in this situation usually can’t pay taxes in full and this leads to penalties, interest due, and the hassle of having to negotiate with the IRS to come up with a payment plan.
How Do You Get Your Refund?
After you maximize your tax refund, there are two ways that you can receive your money back. You can request that the government sends you a physical paper check in the mail. You can then deposit this into your bank account or cash it at a financial institution that offers check-cashing services.
You can also have the government deposit the funds directly into your bank account. This method allows you to get your refund much faster and it can be more secure. However, you do need to make sure you have a personal bank account in order for this to work. For those who don’t have banking services, the paper refund check is the only option but the process can take longer.
Who Gets a Refund?
In order to get a refund, there are some qualifications you need to meet. You need to have had more money withheld for taxes or paid more in tax payments during the year than your actual tax bill. Otherwise, you need to have earned refundable tax credits. You also need to file a tax return that claims your refund amount. You will need to file that tax return within three years of the original due date of the return. This last point is important.
For example, if you never filed a return for 2015 because you knew you didn’t owe any tax and you want to get your refund now, you had three years from the due date of April 15, 2016, to file that return. Once you miss the deadline, you aren’t able to go back and get your refund check, even if you do deserve it.
Tips on how to maximize your tax refund can be helpful but if you are getting a large refund, it also allows you to get larger paychecks throughout the year. Many people love getting a refund because it feels like money you may not be anticipating but that money is actually withheld from your paycheck. Instead, you can have the chance to use that money sooner if you get it in your paycheck.
What To Do with Your Refund
Once you have learned how to maximize your tax refund and got the biggest refund possible, you have to decide what to do with it.
Pay off Your Debts
It can be tempting to treat yourself with that money but you can also use it for financial gain. A smart way to use your tax refund is to pay off any debts. This can include your credit card bill or student loans. If you have multiple debts, put it toward the debt with the highest APR or the smallest one, depending on the debt repayment method you are following.
Invest
You can also use your tax refund to start investing. Consult with a financial advisor on how to invest in a tax-efficient manner.
Save Your Money
Another alternative for your tax refund is to put it into a savings account immediately and avoid the urge to spend it. This allows the money to grow and offers you a way to save toward a goal or to help build an emergency fund.
Popular Tax Deductions
One of the ways to maximize your tax refund is by utilizing all your tax deductions. There are two ways to take deductions. You can use the standard deduction or itemize deductions. You aren’t able to use both.
Standard vs. Itemizing Deductions
The standard deduction is a flat dollar no questions asked reduction in your adjusted gross income. The amount you qualify for will depend on your filing status. Itemizing deductions will let you cut your taxable income by much more for any of the available tax deductions you can qualify for. The more you deduct, the less you will end up paying in taxes.
You need to determine if it makes sense to use the standard deduction or to itemize. If the standard deduction is less than the sum of itemized deductions then you should itemize so you can save money. However, note that itemizing will usually take more time and does require more forms. You need to have proof that you are entitled to the deductions you are taking. If the standard deduction is worth more than itemized deductions then it’s easier to go that route and you will save time.
While there are hundreds of different tax deductions out there, there are some that are more popular than others.
Student Loan Interest Deduction
You can deduct up to $25,000 for your income if you paid interest on student loans.
Child and Dependent Care Tax Credit
You can deduct some daycare costs for a child under 13.
Charitable Donations Deductions
You are able to subtract the value of your charitable gifts, whether in property or cash, such as car or clothes, from taxable income.
Medical Expenses Deduction
If medical expenses are more than 10% of your adjusted gross income then you can deduct unreimbursed qualified medical expenses.
Deduction for Local and State Taxes
You are able to deduct up to $100,000 for a combination of property taxes and local and state taxes or sales taxes.
Self-Employment Expenses Deduction
There are many valuable tax deductions for contractors, freelancers, and others who are self-employed.
Home Office Deduction
This deduction is the one that can get many people in trouble so you do need to be careful with this one. However, if you use part of your home regularly and exclusively for business then you can write off part of the maintenance, utilities, and other related expenses.
Educator Expenses Deduction
If you are a school teacher or eligible educator, you can deduct some money spent on classroom supplies.
Why Work with a Tax Professional?
Taxes aren’t always black and white and, depending on your situation, you may benefit from using a tax professional. There are a number of reasons why it makes sense to work with a tax pro at a tax store.
Time-Saving
Filing your own taxes can be time-consuming. The average person can spend about 24.2 hours completing tax returns. For those who have to file a Schedule C or Schedule E, that number can quickly jump. Depending on how valuable your time is to you, you could be saving money by hiring a tax professional. Tax professionals work quickly and efficiently to save you time and any headache of doing your own taxes.
Deduct Tax Preparation Fees
The fees you pay for tax preparation can be deductible. You can deduct them on Form 1040 as long as the sum of the miscellaneous deductions you are claiming is greater than 2% of your adjusted gross income.
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Tax Professional Keeps Up with All Tax Changes
Filing a tax return can also be complicated and it can constantly change with the tax changes each year. It’s impossible for the average taxpayer to be fully aware of the changes that may apply to you and if you want to maximize your tax refund, you need to be aware of the changes. With a tax professional, you can find credits or deductions that may be missed otherwise. Even software is not going to be bulletproof in finding every deduction that is relevant to your situation.
Tax Attorney
In the unlikely event that you are audited, working with a tax professional can come in handy. A CPA or tax attorney can help you organize any paperwork and can also deal with the IRS directly on your behalf to ensure that you are represented.
Prevent Mistakes
No matter how confident you are about your taxes, mistakes can happen. Many professionals will help you prevent mistakes and will double-check things themselves. There is also a lot of convenience when it comes to using a professional that can be hard to argue with.
Final Thoughts
You get a tax refund when you pay the government too much money throughout the year with the money withheld from your paycheck. However, there are ways to maximize your tax refund. Working with a professional to make sure you manage all your deductions can also be one of the easiest ways to maximize your tax refund.