Here are 10 tips that will help reduce your tax liability and increase that refund if you have one coming to you.
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If you’re employed full time for a company, one of the first things you did when you were hired was fill out IRS tax form W-4. The information you provide on the W-4 determines how much money is withheld from your paycheck each pay period and paid toward your personal income taxes. The calculation is based on the number of exemptions you claim. The more exemptions you claim, the less money that is witheld. Claim less exemptions, then a larger amount of money will be withheld from your check each payday. Your tax refund will therefore be larger.
2. Scheduling & Timing
- If you can, pay January’s mortgage payment before December 31st. You will get the added interest for your mortgage interest deduction.
- Schedule any well visits or annual check ups’ in the last quarter of the year to boost your medical expense deduction potential.
- Paying property taxes by New Year’s Eve could make the difference between itemizing and taking the standard deduction, and thus, a bigger refund. If you’re self-employed, you can pay your fourth-quarter state estimated taxes in December, rather than in January when they’re normally due, to increase your itemizing potential.
3. Deduction All Donations
- Keeping a trip log for your volunteer work, job-hunting and doctor’s appointments may seem like a waste of time, but those miles add up and represent deductions. Parking, toll and bus or taxi receipts support your claim, while a record of the miles you drove lets you write off the cost of using your car through the standard mileage rate. Good travel records could help you reach the needed minimum percentage of adjusted gross income for miscellaneous deductions.
- Moving for a new job 50 miles or more away can boost your tax refund because you can deduct moving, storage and travel expenses related to relocating. (You have to work full time at the new job for at least 39 weeks the first year; however, you can take the deduction in the year you move if you expect to meet this time test within the following tax year.)You don’t have to itemize to get this tax break to lower your adjusted gross income. Simply figure your total using Form 3903 and attach it to your 1040 return.
- Keeping a record of your Charitable deductions can help boost your refund too.
- Claiming the market value of any clothing or household things you donated.
- When you bake for a fund-raiser, the cost of your ingredients can be deducted, but not the value of the time you spent baking.
4. IRA Contributions
- One of the most highly recommended ways to increase your tax refund is to increase your contributions to your retirement fund. Contributing to an Individual Retirement Account (IRA) not only facilitates saving for retirement, but placing money into the IRA lowers the total taxable income because it comes off the top. The more you contribute to the IRA, the less of your income is subject to taxes. Generally, the lower your taxable income, the less you’ll owe in taxes, and the less you owe in taxes, the greater the refund.
Be careful, though, there’s a maximum amount that can be applied for lowering taxable income. (Consult a tax professional to ensure your IRA contributions are made on time and in the right dollar amount.)
5. Professional Expenses
Some jobs require employees to have or use equipment that they will need to purchase out of their own pockets. If the company doesn’t reimburse for those expenses, some may be deducted on income taxes to help maximize a tax refund.
For example, the subscription costs of professional publications that keep you updated about how to perform your job better can be deducted. The same is true of professional dues, such as those you pay to belong to unions or professional organizations.
In addition, if you use a personal cell phone for work, then the portion used for work may be deducted. For professional expenses, be sure to consult a professional tax accountant. Some expenses, such as uniforms and travel, may not be deductible.
6. Filing Status
Filing status, such as single, head of household, married filing separately or jointly, and others, can influence the amount of money you receive in your refund. Filing status may change if you divorce or lose a spouse to death, for example, and this may make you eligible for a larger refund.
In general, married couples may expect a larger tax refund if they file jointly. Filing a joint return tends to lower the overall tax bill and can offer some tax breaks unavailable to those filing separately. There are some reasons, however, that a couple may want to file separately. (for example, if one parent is behind on child support or student loans. or more than the average amount of misc. deductions.)
7. Certain Family Obligations
Taking care of kids (or even your aging parents) can be expensive. Many of these expenses are deductible.
Another family expense that you can deduct is alimony. Healthcare expenses for your family can also be deuctible. You’ll want to consult a tax professional to find out what types (and what percentage) of healthcare expenses can affect your refund.
8. Educate yourself on Current Tax Laws & Credits
These are homebuyer credits that basically put thousands of dollars in some home purchasers’ pockets.
If you remodel your home and add any energy-saving improvements, you can receive credit for this . You may also gain financial favor from the IRS if you purchase certain hybrid vehicles. (Go here to see which vehicles will qualify for tax credits)
To take advantage of current tax laws, you might try one of two things.
- First, you can hire a tax accountant. It’s the accountant’s job to keep an eye on changing tax laws and how they affect your tax return.
- Second, you can use a computer software program such as TurboTax. One of the features such software offers is a yearly update with new tax deductions and credit opportunities that have been affected by changes in laws. The software also has checks and balances built in to ensure you’re taking advantage of available opportunities.
9. Start a Home Business
If you’ve ever thought about starting a business, it can make a lot of fiscal sense. The equipment you use for your business, and portions of the facilities and utilities, may be deductible. Plus you will be making money too!
Home-based business owners can deduct things like a home office, telephone, Internet service and office supplies. “When you start a business, the initial deductions may offer tax refunds, and as the business begins to make money, the continuing deductions provide financial freedom.” Tax accountant Sandy Botkin says that having a home-based business can bring you around $3,000 to $9,000 in tax savings [source: Ask Tax Guys].”
10. Refinance Your Home
When interest rates are low, many homeowners look at refinancing their homes. Those who refinance at a lower interest rate benefit from lower mortgage payments as well as a lower amount paid over the life of the mortgage. When you refinance your home, the majority of your monthly payment is going towards interest. The principal isn’t deductible, but the interest is, so you’ll have a larger tax deduction from the higher interest payments. To determine if refinancing is even a wise decision or not, you will want to take into consideration, your new interest rate, how much you still owe on your house and what it is currently worth.