There are several parts of your federal tax return that you should especially focus on to pay as little taxes as legally possible and maximize your refund for the year. Getting a large tax refund can significantly help your household budget, either by allowing you to pay off debt, splurge on purchases you haven't been able to afford or save up for a summer vacation. Prepare your return carefully to claim every tax deduction and tax credit possible.
Before digging into the tax return itself, first consider whether you can self-prepare the return. The IRS provides all of the instruction booklets needed to prepare your tax return for free and avoid having to pay a tax preparer and cut a chunk out of your potential refund. If you are not confident you can self-prepare, the next best option is to use tax preparation software whether than paying a professional to complete the return for you. You should only use a tax preparer if you do not have time to complete your return or if you have very complicated finances due to a home business or other situations.
One of the best ways to maximize the tax refund you receive is to itemize your deductions. A tax deduction is money that you can subtract from your income to determine your taxable income. The IRS gives you the option of taking the standard deduction, which is a fixed amount per person, or listing money you spent in a variety of categories and deducting the sum of those expenditures instead. Itemizing deductions is very beneficial if you spend a lot of money on home mortgage interest, charitable contributions and medical expenses that insurance does not cover.
To itemize deductions, fill out Schedule A by following the instructions on the form. You need to have receipts to prove all of the deductions you take, so plan ahead by saving your receipts during the year for anything that you can itemize. In addition, many places send you year-end totals for things you can deduct, including Form 1098 that reports deductible home mortgage, points and insurance and year-end statements of charitable contributions sent by churches and other nonprofit organizations. You can also deduct unreimbursed business expenses, state and local taxes, and losses due to disasters or theft.
If you spent money on higher education for yourself, your spouse or a dependent you claim or you repaid student loans during the year, you might be able to claim a tax deduction or tax credit for these. There are two potential tax credits, one of which is specifically for undergraduates and the other for all types of students. You can claim one credit for each student by filling out Form 8863 and attaching it to your tax return. A credit reduces the amount of income tax you have to pay, and in the case of the American Opportunity Credit, can be partially refunded to you if the credit exceeds your tax liability.
Claim the tuition and fees above-the-line tax deduction, which means that the deduction is a direct adjustment to income rather than part of your itemized deductions, by filling out Form 8917. Because you do not have to itemize deductions to get this tax deduction it is especially advantageous if you get to claim the tuition deduction in addition to the standard deduction. You can also deduct up to $2,500 of interest you paid during the previous year on your student loans just by filling in the box on your main tax return.
The last major way to maximize your tax return is to claim all of the tax credits for which you are eligible. If you have children, claim the child tax credit of up to $1,000 per child. If you paid someone else to care for your children during the year, you might also be able to claim the child care tax credit. If your earnings for the year are $39,783 or less with children or $14,590 without children, you may be able to claim the Earned Income Credit, which helps reduce the tax burden of low-income families.
State tax guidelines vary from one state to another, but the same rules that apply to maximizing your federal tax return also apply to the state return. You generally must use the same deductions on the state tax return as you used on the federal return, but read your state guidelines to find out what additional deductions you may be able to take. For education, some states offer a tax deduction for making contributions to a college savings account. Many states also offer tax credits if you have children and a state tax credit that is similar to the federal Earned Income Credit.