It’s hard to get excited at the prospect of preparing your tax returns, but the possibility of a tax refund, whether big or small, can make it worthwhile. You can maximize your tax refund by making the most of every possible tax break. Getting your money back is all about being smart about how you file your tax returns.
Consider planning ahead to give yourself enough time to capitalize on these tax-saving strategies; don’t wait until the tax deadline is looming to start preparing your return. So, here are some strategies that’ll maximize your tax refund and help you be on the right track ahead of the tax season.
1. Choose the Correct Filing Status
Your filing status significantly affects your tax refund because it helps determine your standard deduction, your eligibility for certain deductions and credits, and the amount of taxes you owe. It is important to research and, if necessary, consult with a tax professional to determine your ideal filing status. For example, it usually makes sense for married couples to file jointly, though it’s not always the most favorable option. Filing separately may offer you tax savings under the right conditions, for instance, when one spouse has accrued a large volume of medical expenses. In this case, calculating your tax individually might lead to a larger deduction.
On the other hand, filing separately when married can have its disadvantages. You may miss out on significant tax credits and deductions only available when you file jointly. Both spouses must settle on either itemizing their deductions or using a standard deduction. If you are an unmarried taxpayer with qualifying dependents, you can claim Head of Household status to reduce your tax bill.
2. Take advantage of Tax Credits
Did you know you can receive a more significant tax return by claiming tax credits? Tax credits usually cut your tax liability dollar for dollar. For example, if you have a tax liability of $20,000 and claim a tax credit of $10,000, you only owe $10,000. Depending on your situation, you may be able to claim the following (as of 2023):
- Up to $2,000 per dependent for the Child Tax Credit
- Up to $7,430 via the Earned Income Tax Credit
- Up to $500 for specific energy-efficient improvements
- Up to $2,000 per child for the Child and Dependent Care Credit
It’s important to note that only refundable tax credits, such as Earned Income Tax Credits, can significantly contribute to your tax return.
When the refundable credit amount is more than what you owe in tax, you get a refund on the difference. While non-refundable credits can leave you with a $0 tax liability, they cannot add to your refund.
3. Don’t Overlook Tax Deductions
While tax credits can yield significant tax savings and returns, you should also remember to claim your deductions. Rather than reducing your tax liability, tax deductions lower your taxable income by allowing you to deduct certain expenses. There are several tax deductions that you may claim, which can make a substantial difference in your tax refund. Here are some of the tax deductions that you may not be aware that you qualify for:
- Out-of-pocket charitable expenditures
- State sales tax
- Student loan interest
- Reinvested dividends from mutual funds
When filing your taxes, itemizing is the best choice if you have many deductible expenses such as mortgage interest, charitable donations, student loan interest, and business travel. Your tax deduction will vary depending on the expense, so ensure you support your deductions with receipts or bank statements.
4. Defer Your Income to Your Retirement Accounts
You can defer your income and maximize your tax refund by contributing to your retirement accounts. The IRS allows you to deduct up to $6,000 of savings account contributions if you are under 50 years old and up to $7,000 if you are aged 50 or older. You might also be eligible for a refundable credit, known as a saver’s credit, when you earn less than a specific amount.
Conclusion
These four strategies are just a few of the many techniques you can use to maximize your tax refund. Every dollar counts when it comes to your personal finances, and knowing your tax benefits can put more money back in your pocket.