02 Dec Prepare Now to Maximize Your Tax Refund Next Year
During tax season, millions of filers anxiously await refunds. But what if you could increase your refund or reduce the amount you owe Uncle Sam with a few simple moves. To qualify for many tax benefits, you must take action before December 31st. Here are five ways to manage your tax obligations and maximize your refund before the tax season begins.
Adjust Your Withholding: Employers deduct taxes from every paycheck (in addition to Social Security and Medicare taxes) based on your withholding status. Most employees choose a withholding level at the start of a new job and never review it. Anyone receiving a large refund the previous year could benefit from adjusting current employer tax withholdings. Start with the number of dependents and then consider things like home ownership, qualifying for the earned income credit, and other factors. The IRS provides a tax withholding estimator to help you decide what to claim. While adjusting your W-4 withholdings will not increase your tax refund, it can increase your paycheck, which could be more beneficial than a one-time annual payment.
Gather Receipts: You can only claim what you can prove, and receipts are the most common form of evidence available. In an age where physical receipts quickly fade, and retailers prefer electronic receipts, showing you have qualified expenditures requires more diligence. One of the easiest ways to track qualified expenses is to scan the receipt and keep records through a free app or accounting software. You can also track some costs, like subscriptions and bill payments through credit card statements.
Which tax filers have qualified deductions? If you have high medical bills in relation to income, own a home, or worked a side job resulting in a 1099, you might qualify for additional tax deductions. For instance, delivering meals, driving for Uber, or renting your home through Airbnb, makes you an independent contractor, and could qualify you for additional tax write-offs, even if you do not itemize deductions.
Reduce or Eliminate the Impact of a 1099 on Settled Debt. If you have diligently working to reduce your debt through a debt settlement program, and successfully completed a settlement, you may receive a 1099 from a creditor for the amount of the debt that was written off. While this is an infrequent occurrence, receiving a 1099 for settled debt can result in additional income you may need to pay taxes on in the current year. However, there are a number of ways you can reduce or eliminate the impact of a 1099 on settled debt. To learn how, Click Here.
Review Tax Credit Qualifications: A tax deduction lowers taxes by reducing income, resulting in a savings equivalent to your tax filing rate times the amount of the deduction. However, a tax credit, reduces your tax liability dollar for dollar. Taking advantage of any available tax credits can significantly increase your refund. The IRS offers tax credits for dependents, education, home repairs, and retirement savings for qualified filers. Take time to make sure you’re tapping into every available qualifying tax credit.
Meet The Criteria for Above-the-Line Deductions. The recent passage of the JOBS act doubled the standard deduction, eliminating the need to itemize for millions of tax filers. Those who qualify can still take deductions without itemizing, lowering taxable income. Above-the-line deductions include healthcare savings account (HSA) and Individual Retirement Account (IRA) contributions, healthcare premiums for the self-employed, some moving expenses, educator expenses, self-employment tax, and student loan interest to name a few.
Defer Income and Accelerate Deductions: While this strategy lowers taxes in the year you file, it could increase taxes in the following year, if income remains steady. Ways to lower your income include delaying a bonus or commission check until January. You can also accelerate deductions, which might include paying property taxes early, selling stocks at a loss to offset gains, or accelerating depreciation.
Lowering your tax obligation could give you a larger refund, giving you the funds needed to pay down debt, accelerate retirement savings, or fund other financial needs that would otherwise end up on a credit card.
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