5 Ways to Maximize Your Tax Refund

5 Ways to Maximize Your Tax Refund

5 Tips to Maximize Your Tax Refund

  • Focus on deductions to lower your adjusted gross income, like maximizing IRA, or HSA contributions.
  • Do some research to find tax credits you may qualify for.
  • If you received 1099’s from multiple sources of income, see if you qualify to itemize deductions, then compare the results against taking the standard deduction to ensure you get the biggest refund available.
  • Make sure report all your income, event the most insignificant amount of interest reported by a bank savings or interest-bearing checking account. Failure to do so can trigger penalties or even an audit.
  • File your return on time. Late payment and filing penalties add up fast and can quickly most or all your tax refund.

The IRS uses multiple data points to determine the amount of taxes a filer owes each year. In many cases, lowering your tax bill requires action prior to December 31. However, there are a few things you can do now to reduce the amount you must pay and maximize your tax refund.

  1. Focus on above-the-line deductions, which lowers your Adjusted Gross Income or AGI. Most government programs and IRS rules use the AGI as the benchmark for earned income. Beyond reducing the amount of income taxed, a smaller AGI could qualify you for additional tax credits or other benefits beyond the tax rate.
  2. One popular option is to contribute to tax-advantaged accounts like a Traditional IRA or HSA. The IRS allows contributions up to the tax filing date of April 15, in the year you file. Typically, you can contribute to an IRA (individual retirement account) even if you participate in a work-sponsored retirement account such as a 401K. HSA (healthcare savings account) contributions requires enrollment in a high deductible health insurance plan.
  1. Take all your qualified tax credits. Tax credits lower your IRS bill dollar for dollar. For example, if you owe $5,000 in taxes, but qualify for a $2,000 tax credit, you only pay $3,000. The IRS offers tax credits for many things, including moderate-income households, having minor children, caring for dependents, higher education costs, and certain home improvements.
  2. IRS tax credits are either non-refundable or refundable. Non-refundable credits lower the tax bill to zero, but no more. Refundable tax credits can increase your refund even if you have no tax obligation.
  1. Double-check itemized deductions. The JOBS act of 2017 doubled the standard deduction, reducing the number of families who benefit from itemized deductions. However, tax filers with high out-of-pocket medical costs, or other qualified expenses could receive a bigger tax benefit by itemizing.
  2. Beyond itemizing personal expenses, anyone receiving a 1099 can deduct work-related costs for self-employment, even if it is part-time work. As a business owner, you might qualify to deduct cell phone costs, office expenses, the value of using your vehicle for work purposes, the cost of maintaining a home office, or other work-related expenses. These deductions can lower taxable income and offset some or all the 1099 income earned.

RELATED: How to Reduce or Eliminate the Impact of a 1099-C on Settled Debt

  1. Report all your income. When a company forwards a W-2 or 1099 to you, the IRS also receives a copy. Failing to report even a small interest payment will result in an IRS audit, which can lead to a higher tax bill with interest and late payment penalties.
  2. Meet the IRS deadlines. Failing to file on time will cost you extra due to late penalties and interest. When you fail to file by the deadline, the IRS charges 5% of the amount owed per month in penalties plus interest. Filing an extension will grant you additional time to file, but no additional time to pay.

Final Thoughts

Maximizing your tax refund requires you to file on time and keep track of qualified expenses for tax deductions or credits. Getting organized before you file and making additional contributions to lower taxable income will help maximize your refund this year.

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