If you are looking for ways to get a bigger tax refund, then you certainly are not alone. In fact, you are practicing something the IRS encourages: Tax avoidance.
By definition, tax avoidance is legally utilizing all options to one’s own benefit, for the purpose of reducing the amount of tax that is payable by means that are within the law.
In other words, this means taking advantage of all available credits, deductions, exemptions and allowable expenses in order to pay as little tax as you can.
With that in mind, here are six ways you can maximize your tax refund.
No one really likes to think about taxes outside of the springtime tax season, and even then we do it only because we have to. Change your mindset though and start thinking about your taxes as early as January of the following year.
Many taxpayers do not realize that during the year, they can adjust the amount they have withheld from their pay. Form W-4, Employee’s Withholding Allowance Certificate, is used to advise your employer of the rate you want taxes withheld from your pay.
Consider completing a new Form W-4 not only when you begin your employment, but in the beginning of each year and when your personal or financial situation changes. Look at the bottom line on your previous year tax return and adjust your W-4 accordingly. Increase your withholdings to cover any tax due, decrease them if you would like more in your take home pay.
If you are self-employed, start early and keep an organized file of all potential deductions. Don’t wait until April to start going through the pile of receipts and expenses that you shoved in the sock and underwear drawer.
When you prepare your 1040, the IRS allows you a choice to either take a standard deduction, or to itemize your deductions. Choose the one that takes more off of the gross income you ultimately will be taxed on.
You may not be sure if your itemized deductions will yield a greater amount than your standard deductions so keep a list of the following expenses as you incur them. These are just some of the deductions you are allowed to take on your Schedule A. When it comes time to file, choose the option with the higher amount.
- Medical and dental expenses: This includes insurance premiums for medical and dental care, all doctors and specialists including acupuncturists, chiropractors and dentists, medical exams and tests, in-home nursing care, medical aids like eyeglasses and hearing aids, and all prescription drugs.
- State and local taxes: The IRS allows either a deduction of 100 percent of the taxes you had withheld from your pay from the state, or you can deduct the actual amount of sales taxes you paid on purchases made during the year.
- Real estate: This includes property taxes you paid, as well as interest you paid on your mortgage loan.
Other deductions include charitable contributions, losses from a fire, flood, other disasters or theft, a new motor vehicle tax (new on 2010 taxes), unreimbursed employee expenses, and tax preparation fees.
If the total of these exceeds your standard deduction, go with it! For reference, the standard deduction for a couple filing jointly in 2010 was $11,400. This changes per year but if your itemized deductions are projected to top that, then keep careful records of the above.
Take Advantage of all available Tax Credits
There are certain credits that traditionally get overlooked. Foremost among them is the Earned Income Tax Credit (EITC), a government credit available to lower income individuals and families. The EITC can not only reduce the amount of tax you owe dollar for dollar, but is also a refundable credit, meaning it can generate a refund on its own merit.
Individuals who have no legal filing requirement, such as seniors who work part-time or students with minimal income, should check to see if filing a return would put them in line for this credit. You also do not have to have children to claim this credit
Use the IRS EITC Assistant to see if you are eligible for the credit.
Other credits you don’t want to overlook include the Child Tax Credit, Qualified Energy credits, Education Credits, and the Credit for Child and Dependent Care. Visit IRS.gov for details.
Additional Child Tax Credit
The Child Tax Credit grants a taxpayer a cool $1,000 per qualified child. If the amount of your Child Tax Credit is greater than the amount of income tax you owe, you may be able to claim the Additional Child Tax Credit. This credit is designed for certain individuals who get less than the full amount of the Child Tax Credit. The Additional Child Tax Credit may give you a refund even if you do not owe any tax.
For more information, see IRS Publication 972.
Avoid Refund Anticipation Loans
Many tax preparation firms offer a product called a Refund Anticipation Loan (RAL). The IRS does not offer any type of loan in conjunction with your tax refund.
A RAL is essentially an advance of your tax refund. For example, if you go to H&R Block to have your taxes prepared, you may have a refund of $2,000 coming to you. If you need the funds immediately, H&R Block will “loan” you the refund, then, when the IRS sends them your refund, they will keep it.
RALs are rarely worth the extra costs involved. Generally, there is a fee to obtain the loan, and some tax prep places charge interest on the money as well. If there is a delay with your tax refund, or if an error or audit causes your refund to be reduced, now you have two problems — owing the tax prep agency and possible the IRS as well. Don’t discount this; it happens very frequently.
The IRS can process an electronically filed tax return in as little as two weeks. If you elect to have your refund directly deposited into a bank account, you can shave off another week in processing time. Unless you need your refund instantly because of a hardship, avoid a RAL at all costs.
This list is certainly not all-inclusive, but here are a few often overlooked deductions and write-offs:
- Alimony paid out
- Appraisal fees
- Birth control pills
- Braille and all products for the blind
- Drug and alcoholism treatments; also prescribed wight loss products and treatments
- Entertainment for clients
- Home office expenses
- Job hunting costs
- Travel for your job
More from this Contributor:
Parents: Make sure you are taking advanatge of thesefour tax credits
5 places to go for free IRS tax advice
Are you eligible to take the Child Tax Credit?