The right strategy will help you minimize your tax liability, and snag a larger refund. But what you choose to do with the refund can also help you minimize your tax bill next year.
By taking advantage of every possible tax break, you can minimize your tax liability, and potentially snag a larger refund.
1. How To Get The Most Back On Your Tax Return
Begin with your filing status because it can have a significant impact on your tax refund, regardless of whether you’re single or married.
For most married couples, it makes sense to file jointly but, in some situations, you should also consider filing separately. Make both calculations and compare which one is more beneficial.
For example, filing separately will cause you to miss out on some key tax credits but if one spouse has significant medical or business expenses, filing separately may increase the amount you can deduct. Even if you are single, you can consider filing as head of the household which will increase your refund.
More importantly, you need to embrace credits because they directly reduce the amount of tax you owe on a dollar-for-dollar basis. Certain credits may even be refundable, meaning you can claim them even if you don’t have any tax liability. Some examples are education, energy efficiency, and child tax credit.
Although credits are better than deductions, you shouldn’t ignore deductions as they also save you money by reducing the amount of income that is subject to tax. You should also decide whether to take the standard deduction or itemize as itemizing becomes the smarter choice when you have a lot of deductible expenses. Such expenses are home-office expenses for the self-employed and charitable donations.
It’s never too soon to start saving up for retirement and it will also earn you a tax bonus. You can fund your IRA for the previous tax year right up to the filing deadline which has been moved to May 17th and your contributions may be partially or fully deductible. Since it is an above-the-line deduction, you can take the deduction without itemizing. You could also be eligible to claim a tax credit for your contribution to both traditional and Roth IRAs.
2. Smart Ways To Use Your Tax Return
Depending on how much you are getting back, you should use this money wisely instead of immediately spending it on necessities and household expenses such as rent and Penn Power utilities.
A smart way to use your tax refund would be to use it to pay off any existing debt such as student loans, a mortgage payment, or your credit card bill. If you are struggling with multiple debts, direct it to the loan with the highest APR.
You can also use it to invest. A tax refund marks a great chance to improve your future. While fluctuations make the stock market a risky choice for short-term earnings, the long-term outlook can be dazzling with the help of a financial advisor. But, if you don’t feel like trading is your forte, investing can also mean investing in yourself to take your career to the next level by taking a course or specializing in something new to open your own business. Upgrading your skills will not only help you increase your earning potential but also help you take advantage of the Lifetime Learning Credit so you can use the costs of the course to minimize your taxes next year.
You could also use the money to make your home more energy-efficient which can make you eligible to minimize next year’s taxes, increase your home’s resale value, make it more comfortable and reduce your monthly utility bill along the way as you will end up using less energy.
A good idea is also to put this money away so you avoid the urge the spend it and let your money grow. It’s up to you if you will start building an emergency fund first to protect yourself from unforeseen events that could push you into an expensive loan or start creating a savings account such as the one to fund your retirement or your kid's college. Given the power of compounded interest, starting young is the best approach for a well-funded future and golden years.
When it comes to taxes, every penny counts, especially when it comes to increasing your tax refund. Boosting the tax refund you get back from the government is about optimizing your deductions, claims, and credits, without forgetting that even your filing status can get you a bigger refund. Don’t be lazy and do the necessary calculations to find the one that is most beneficial for you. When deciding what to do with your refund, ideally choose something that you can benefit from in the future, either in the form of using it to minimize next year’s taxes or of it improving your future position and wellbeing.