As April 15th, the tax filing deadline, looms, you may be wondering how to increase your tax return. There are plenty of legal methods you can use to lower your federal tax debt, and receive a larger refund check. Many people pay higher taxes simply because they aren’t aware of all the credits and deductions for which they qualify. In order to adopt most of these strategies, such as itemizing your deductions, altering your W-4, or opening a retirement account, it’s usually necessary to do some financial planning ahead of time. You should also keep track of receipts and financial statements that detail purchases and expenses, in case the IRS audits your tax return.
Each year tax laws change, often providing new credits. It’s important to stay current on these news credits, because taking them can significantly lower your taxable income, and hence your tax liability. To learn about some of the more commonly taken tax credits, visit the Federal Government’s online tax savings tool. For more in-depth information, you can visit the IRS website, or you can consult a book on tax law. If you’re trying to figure out how to apply these credits when filing your return, consider purchasing tax preparation software that can assist you through the process. Taxpayers who earn $58,000 or less also have access to free, online tax preparation software through the IRS free file program.
Most taxpayers have the option to take either a standard deduction or itemize their deductions. Itemizing your deductions can be tricky, because it requires that you file the long Form 1040, and not 1040EZ or 1040A. To determine whether you can net a larger tax return by itemizing, download Schedule A, and calculate the deduction you can take by itemizing. If you own a home and made mortgage payments or paid property taxes, incurred substantial medical costs, made donations to charitable organizations, or were the victim of insured theft or losses, then it’s likely that you can increase your deduction by itemizing. Other deductions you can itemize include state income or sales taxes, business expenses not reimbursed by your employer, and certain types of investment interest.
In addition to taking a standard or itemized deduction standard, you can also take “above-the-line-deductions,” which lower your adjusted gross income. In order to take most of these deductions, you must submit a long Form 1040 return. You can deduct contributions to qualify plans including certain IRA and 401(k) plans, alimony payments to a former spouse and moving expenses, if you relocated for employment purposes. Certain types of professionals including educators, performing artists, and self-employed individuals can deduct business related expenses. Students can deduct tuition, fees, and related educational expenses, while former students can deduct student loan interest. It’s important to note that you can take either a deduction or credit for tuition, but not both, and you should calculate your return both ways to determine which strategy results in the lowest taxable income.
Payments include funds withheld from your paychecks or unemployment insurance, as well as certain types of credits. Credits that fall under the “payments” section of your return directly lower your tax liability on a dollar-for-dollar basis. If you bought your first home, lived in the same for the past five years, adopted a child, or attended college, you probably qualify for a credit. Additionally, many low-income individuals may qualify for the earned income credit, and certain high-income individuals may qualify for the minimum tax credit. In many instances, only the number of the additional form you must submit to take the credit is listed, and not the credit itself, which means it’s up to you to determine what the credit is for, and whether or you not qualify to take it.
Although you’re not reducing the amount of tax you owe, by altering your W-4 to increase the amount of tax withheld from each paycheck, you can increase the size of your refund check. The drawback to this strategy is that you’re essentially giving an interest-free loan to Uncle Sam. However, some people prefer to know they’ll receive a large refund check come tax time, and the peace of mind may be worth more than the investment income to these individuals. Alternatively, if you need to need to increase your current cash flow, and you notice that too much money is being withheld from your paycheck for tax purposes, you can submit a W-4 indicating that you an increased number of deductions. To do this, you may need to estimate your itemized deductions.