5 Smart Ways to Maximize Your Tax Refund
Tax season is one of the most hectic times of the year. Obviously, most Americans (if not all) are aiming to pay no more than what they owe. It's why filing a tax return takes so much effort; you need a lot of documentation in order to get tax deductions. In addition, you want to make sure that you don't withhold too little. You don't want to end up owing the IRS.
But there is one thing that all of us love when April 15 comes around – tax refunds. This money can be used for any number of things, such as funding your next vacation, padding your savings account, or paying off emergency personal loans or other types of debt.
Because tax laws frequently change, the amount of tax that will be refunded to you will vary. However, that doesn't mean that you can't do anything to ensure that it's as big a refund as you can get. In fact, there are several "somethings" that you can do to maximize your tax refund.
What's a Tax Refund?
As the name already implies, a tax refund is reimbursement of some of your taxes by the government due to overpayment. In short, you get some of your money back if you ended up paying more than what you owe. Now, why does the government provide refunds? Basically, the IRS knows that a lot of people are not financially responsible enough to have set aside money at the end of the year to pay their tax return. This can lead to interest and penalties, not to mention the need to create long-term payment plans just so the government can get what they're due. In addition, the government needs a constant stream of income throughout the year to pay employees, fund projects, etc. Because of this, the IRS withholds money from your monthly paycheck, covering part of your yearly tax bill. However, the government usually withholds more than it needs to, just to ensure that you pay what you owe and not a penny less.
Do I Qualify for a Tax Refund?
Anyone can get a tax refund as long as they fulfill these three requirements:
- You paid more than your actual tax liability, had more money withheld for taxes, or earned tax credits that are refundable.
- You filed a tax return to claim the tax refund.
- You submitted your claim within 3 years of the original due date of your tax return. For example, you learned that you got a tax refund on your 2016 return. The due date for that tax return is April 2017. That means you have until April 15, 2020, to file your claim. If you miss that deadline, you can no longer file a return and get your money back. Even if you deserve it.
How to Increase Your Tax Refund
As we've already mentioned, there are several ways to maximize tax refunds. Below are some tried-and-tested refund-boosting methods that you can employ:
- Adjust your withholding. If you're only withholding a small amount from your paycheck, chances are you're only going to receive a small refund. Worse, you may end up owing the IRS come April. One way to prevent this headache from happening is to increase your withholding per month. If you're an entrepreneur, you likely pay your business taxes per month by estimating your income tax liability and self-employment tax. Similar to an employed individual, you can opt to overestimate your taxes in order to get a big refund. Just remember that this also means a smaller income throughout the year.
- Claim the best filing status possible. There are several that you can choose from - Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualified Widow(er) with Dependent Child. The amount of tax you pay will be dependent on the filing status you qualify for. These different filing statuses come with different income brackets, on which tax rates are based on. For example, a single individual will need to pay a different amount than a married couple filing jointly. In certain situations, a married couple filing separately can give you tax savings. It's best to prepare your tax returns with different filing statuses that are applicable to your situation. Yes, it will be tedious, but you'll be able to see which one yields you the biggest tax refund.
- Know your deductions and credits. There are plenty of tax credits and deductions offered by the IRS that can help lower your tax liability and maximize tax refunds. For example, low to middle-income taxpayers can avail of the Earned Income Tax Credit which can get you thousands of dollars in credit, especially if you have children. What makes this tax credit one of the best is that even if you don't owe anything in taxes for the year, you can still claim this tax refund. As for deductions, you can choose between standard and itemized. You will need to perform both to see which one gets you the most deductions, lowering the amount of income you have that's taxable. Here's a tip: interest paid on online loans is usually not tax-deductible. But if you used part of the loan amount for business purposes, you can claim the portion of the interest used on legitimate business expenses on your taxes.
- Contribute to a traditional retirement account or health savings account (HSA). Making contributions to health saving accounts can reduce your taxable income. The great thing about this is that you can do this at the end of the year as long as it's done before the due date, which is April 15. Not only can you save for retirement and medical expenses, but you also get a bigger tax refund as well.
- Don't withdraw from your retirement accounts. The money in these accounts is not subject to tax upfront. Instead, they are taxed only when you start withdrawing money from the accounts. So, if you start getting money to cover living expenses, you will need to declare the money as taxable income during the same year you made the withdrawal.
Consult a Tax Professional
The IRS provides guidelines for taxpayers to follow when filing their federal tax returns. However, not everyone has an easy time during tax season. Hiring a tax professional can help you identify tax credits and deductions, so you only pay what you owe. Yes, this may mean that you get a smaller refund. But it also means a bigger paycheck throughout the year, which can be used in a similar fashion. You can save, invest, or pay off debt such as personal loans online. Moreover, when you overpay the government, you're essentially loaning them money interest-free. And who wants to do that? Plus, you must wait for the IRS to give you that money back. That’s money that you could have used much sooner
Whatever your case may be, it always pays to be smart about your taxes. You should do all you can to maximize tax refunds, but you should also look for ways to reduce your overall tax bill. That's the key to a successful tax return.
