When it comes to doing your taxes and getting a tax refund, most people stop at “good enough”. Tax time is stressful, complicated and, for many, a venture into unfamiliar territory. Sometimes it’s a victory just to finish filing on time.
While that’s an understandable approach, it’s also a missed opportunity. When you do the bare minimum, you end up leaving money on the table for Uncle Sam to pocket. The IRS isn’t out to get you, but they have no obligation to let you know about the thousands of dollars in deductions and credits you haven’t claimed. That’s up to you.
If you’ve been unsatisfied with your tax refunds in the past, read ahead for tips on how to change that.
How to Get the Biggest Tax Refund
The key to getting the biggest refund is to qualify for as many deductions and credits as possible. Tax credits lower your total liability, while deductions decrease your taxable income. Both can help lessen how much you owe and improve your chances of getting a refund.
The simplest way to increase your refund is to change the withholding on your W4. Anyone who works as an employee fills out a W4 when they first start. That form tells your employer how much to withhold on your paycheck for taxes. If you want to get a bigger tax refund, fill out a new W4 and claim fewer allowances. If you previously claimed 2 allowances, only claim one.
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Here are some more ideas on how to maximize your chance of getting a refund:
- Talk to an accountant. Most people can get by using online software to file their taxes, but if you’re worried about missing deductions or tax credits, it’s more helpful to talk to an experienced accountant. They’ll be able to ask the right questions in order to determine your eligibility. If consulting a professional doesn’t seem to make a difference, you can go back to your software next year.
- Contribute more to a traditional IRA or 401k. Many people use a Roth IRA or Roth 401k to save money for retirement, but those contributions aren’t tax-deductible. If increasing your tax refund is your primary concern, then use a traditional IRA or 401k for your retirement account. You can contribute up to $5,500 in an IRA and $18,000 in a 401k annually.
- Deduct business expenses. You can deduct work-related expenses whether you work for yourself or for a traditional employer. If you drove to a meeting for work and your boss didn’t reimburse you for the miles, you can deduct those. If you took an art class and work as a graphic designer, you can deduct that too. Not sure about whether an expense counts? Talk to an accountant who can tell you when you’re stretching the the definition of “business expense”.
- Donate to charity. If you itemize your deductions, you can claim charitable contributions as long as they were made to a 501(c)(3) organization. Cash contributions are the most common type of donation, but you can also claim property and physical goods if you gave them to a reputable charity. For example, someone who donated a car to their local women’s shelter can deduct the value on their taxes just the same as if they wrote a $500 check.
- Add up your healthcare costs. A deduction that few people take advantage of is the qualified medical expense deduction. If you spent more than 10% of your adjusted gross income on health-related expenses, you can claim anything above that 10% as a deduction. This deduction is one of the hardest to qualify for, since it requires you spend a higher-than-average amount on health care. Plus, only those who itemize their deductions are allowed to claim this deduction.
- Get creative. “Creative accounting” is often a euphemism for embezzling, money laundering and other illegal or unethical accounting practices – that’s not what we’re advocating here. But there’s no reason why you can’t get a little creative with your deductions. There are plenty of small or little-known deductions that, depending on the person, could add up to thousands. Some examples include turning your hobby into a small business, claiming expenses from your home office, and deducting the money you paid to file your taxes. Just be sure to double-check your eligibility – the IRS does not take kindly to people trying to game the system.
Why It’s Not Always Great to Get a Tax Refund
Most people rejoice at getting a huge tax refund, but it’s not always something to celebrate. A tax refund is like handing your money to the IRS and waiting for them to give it back to you months later for free. You’re essentially giving the government an interest-free loan.
If you had access to that money the whole time, you could have paid off debt or invested in your retirement. When you get a huge refund, it means you lost out on the opportunity to save or earn interest on that amount during the year.
Always try to qualify for as many tax breaks or deductions as possible, but if you find yourself getting a $5,000 refund, it might be time to adjust your withholding.
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