Maximizing Deductions, Increasing Tax Refunds
Tax refunds always ring a bell of great news for the taxpayer. A welcome addition to your savings, some spare money for your shopping spree, or to cover up a debt—there is always a space that welcomes more cash on your end. With the Refund Status tool available from the IRS online, you can even anticipate when and how much cut you get to save from your tax returns.
While bigger tax refund means bigger cause (and cash!) to celebrate, you may have more tax refunds than you could, had you been more precise on preparing your tax obligation.
Paying taxes is inevitable; but controlling how big of a refund you can avail of is something you really don’t have a say in. But fret not, there are legit means by which you can maximize your tax refund:
- Check your W-4
If you are currently employed under a full-time job, the amount of tax withheld by your company from your compensation is based on your form W-4. This form is where you put in the exemptions you claim to reduce the money withheld from your paycheck each pay period. This also means that the more exemptions you claim, the less the amount withheld from you. However, you might want to consider reviewing your W-4 form and rethink the exemptions you claim.
Perhaps you can reduce the exemptions you claim in your W-4. While more amount will be withheld from your paycheck, it also means larger tax refunds. You can talk to your HR about your W-4 to see if you can make this change at this time of the year.
- Deduct Donations
No good deed comes unrewarded. If you have been engaged in some charitable causes lately and have been donating your hard-earned cash in non-profit organizations, you might want to claim these donated amounts as tax deductions.
You only need to prove that the charitable institution is a non-profit one that has a 501(c)(3) tax status, and that your donation is substantiated by a receipt.
However, it is important to note too that not all donations to non-profit organizations are deductible, and that there is a ceiling as to how much of your donations may be deducted on your tax returns.
Some common expenses that are deductible include:
- Mileage- If you use your car to assist a charitable, non-profit organization.
- Property- If you have donated clothing, automobiles, furniture, real estate, office supplies, and electronic equipment.
- Titles- tithes to churches and other types of religious organizations.
- Expenses Related to Profession
Some jobs require employees to purchase equipment and implements necessary for the exercise of their profession. In the event that the employer-company does not reimburse the employee for this expense, the employee can claim this as a deduction on their income tax to help maximize tax refund.
Subscription costs on a professional magazine or publication and professional association dues are also deductible.
Other professional expenses though such as mobile phone for work, uniforms, and travel expenses may not be deductible.
- Update Your Filing Status
Your filing status can greatly affect the amount of tax refund you can get. Whether you file as single, head of household, married filing jointly or separately, and others; you may be eligible for a larger tax refund depending on your current personal circumstance. For instance, changing your filing status as you obtain a divorce or lose a spouse to death, may grant you more tax refund.
Married couples who file jointly may expect a larger refund than couples who file separately. Joint return implies lower tax bill, offering some tax breaks which are not available to those filing separately.
On the other hand, couples who have a large amount of unreimbursed medical expenses, above average amount of miscellaneous deductions, or if one spouse is behind on child support or student loan debts, may opt to file separately to maximize tax refund.
- Familial Obligations Count
Taking care of your kids to your aging parents is synonymous to huge expenses—but the good news is that this kind of expense is deductible. You can actually deduct dependent adult care or the costs associated with taking care of your child or parent. Healthcare bills can be deductible too.
It is also important to note that while child support is not deductible, alimony is.
- IRA Funds
Increasing your Individual Retirement Account (IRA) contribution lowers your taxable income. Your IRA contributions comes off the top of your income; thus, working in great ways for both ends for you: one, you get to increase your tax refund and two; you increase your contributions to your retirement account.
This means that the more you contribute to your IRA, the less of your income becomes subject to tax—as you owe less in taxes, the greater your refund will be.
A word of caution to this though would be that you have to make sure that you make your IRA contribution by the deadline, and that you should know your limits.
- Refinancing Your Home
More often than not, homeowners take advantage of low interest rates by refinancing their homes. While they may benefit from lower mortgage payments, this can also rack up your tax returns.
For instance, in a fixed home loan, the homeowner will pay the mortgage holder (banks) a fixed amount monthly for a fixed period of years. These payments are applied to the principal balance and the interest the mortgagor charges for the cost of money.
The practice is that the initial monthly payments are applied towards the interest with smaller amounts applied towards the principal. On the succeeding months though, this formula tips a little bit the other way. At the end of the mortgage period, the homeowner is actually paying more of the principal than the interest.
However, when you refinance your home, this formula turns into having a majority of your monthly payments applied on the interest. The principal—take note—is not deductible, but the interest is. Thus, you have more tax deduction from the higher interest payments.
With this, determining which is a wiser strategy based on how much you still owe on your house should do you good in the long run when it comes to tax refunds.
- Be Updated on Tax Laws
Tax laws are updated every now and then, and there are a lot of opportunities to maximize tax deductions if you know how to apply the laws—or at least, if you know where to find these opportunities. For instance, there are recent tax laws that include new homebuyers’ credit, credit for eco-friendly and energy-saving improvements on homes, and other financial favor from the IRS from buying hybrid vehicles.
- Put Up A Home Business
Home-based businesses can deduct things like Internet service, telephone bills, and office supplies—among many others. When you start a home business, initial deductions may offer tax refunds as the business is yet starting out. A home-based business can bring about $3,000 to $9,000 in tax savings.
- Plan Your Taxes
Engaging in tax planning is probably the most efficient and effective means to maximizing tax deductions and tax refunds. This usually starts at the beginning of each tax year, and takes into account every aspect of your cash flow—from income to expenses. Tax planning can also help you become more conscious of your expenditures as much as it can help you plan your investments better.
Whether you plan on implementing these strategies on your own, or as you intend to hire a tax professional, taking advantage of the legitimate means to maximize opportunities for tax refund is always worth the effort.