Business

5 Expert Tips for a Winning Tax Return

While opinions among Americans regarding how the government spends our taxes may vary, many of us are looking for ways to either pay less than what we owe or even raise our taxes — during tax season. These tactics go above and beyond the obvious to provide you with tried-and-true methods for lowering your tax bill. The 5 Ways to Win the Tax Return Game are listed below.

Tips To Win The Tax Return

1. CONSIDER YOUR FILING STATUS

Choosing a file status, one of the first decisions you make when submitting your tax return, might have an impact on the size of your refund, especially if you’re married. While over 96 percent of married couples file a combined return each year, it is not necessarily the most advantageous option. Married separately filing generally involves more effort, but the time you put in might result in tax benefits if certain requirements are met. If one spouse, for example, has a lot of medical expenditures calculating taxes separately may allow for a bigger deduction. Separately filing spouses might get the Child Tax Credit. The credit for 2020 is $2,000 per kid under the age of 17, and it may now be claimed by a separate filer with an adjusted gross income of less than $200,000. The American Rescue Plan increases the per-child credit to $3,600 or $3,000 depending on your child’s age and covers 17-year-olds for your 2021 tax return, which you will complete in 2022. In addition, until the year 2021, the credit is totally refundable. The IRS will begin issuing advance payments of the 2021 Child Tax Credit in July 2021, in order to get money into the hands of families quicker.

Separate filings include disadvantages, such as the loss of some deductions available to joint filers. To optimize your refund potential, you’ll need to consider this carefully. If they fulfill the criteria, unmarried taxpayers who claim a qualified dependent can typically reduce their tax costs by filing as Head of Household. Many taxpayers who look after elderly parents are unaware that they are eligible to claim Head of Household status. You can register as Head of Household if you give more than half of your parent’s financial assistance, even though your parent does not reside with you.

2. EMBRACE TAX DEDUCTIONS

There are numerous deductions that you may not be aware of, and several of them are frequently disregarded. Pay stub provides an exact and true picture of these tax deductions. The tax deductions you are eligible for might have a big impact on your refund. Here are a few examples:

i. State sales tax

You can figure out how much of your state and local sales taxes you may deduct using the IRS’s calculator.

ii. Reinvested dividends

Although this isn’t strictly a deduction, it can help you save money on your taxes. Include the cost basis of mutual fund dividends when they are automatically reinvested. You may be able to lower your taxable capital gain when you sell shares this manner.

iii. Donations made out of pocket

Donating a large sum of money isn’t the only option to obtain a tax deduction. Keep track of eligible minor costs as well, such as the materials for the delicious cake you brought to the bake sale. You might be amazed at how quickly a few philanthropic donations build up.

iv. Interest rates on student loans

You can reduce this even if you did not have to pay it yourself as long as you are the one who is responsible for it. If someone else pays the debt, the IRS treats it as if you were given the money and used it to pay the student loan, according to new IRS guidelines. You will be qualified for the deduction if you fulfill all of the conditions.

v. Child and dependent care

The Child and Dependent Care Credit can be applied for up to six thousand dollars in eligible costs in 2020. The American Rescue Plan makes major modifications to the amount and method of claiming the child and dependent care tax credit for 2021. The proposal raises the amount of creditable expenses, softens the credit reduction due to income levels, and makes the credit entirely refundable. This implies that, unlike previous years, even if you don’t file taxes, you can still obtain the credit. Although these new regulations only apply to the tax year 2021 (taxes due in 2022), they can dramatically boost the bottom line of your tax return if you’re a working parent who is responsible for the expense of your dependents’ care.

vi. Earned Income Tax Credit

This credit benefits low- and middle-income households. It’s aimed towards working families with kids. If you have three or more qualified children, the credit may be worth up to $6,728 in 2021, and you might get a refund even if you don’t owe any taxes. If you paid cash on your statewide income tax return last year, you can add it to any other state tax and use it as an additional amount up to $10,000.You can claim the money you paid over as an adjustment to your income if your company paid you while you were on jury duty and your employer compelled you to hand up your jury duty salary from the court.

In 2020 and 2021, it is worth 20 cents per mile and is subject to an overall AGI level for total medical costs. Any unreimbursed medical costs that surpass 7.5 percent of your AGI count against the threshold. It’s critical to keep detailed records for your deductions, especially when you don’t get a receipt, such as with charity contributions and charitable or medical miles. It’s not necessary to have anything fancy; a spiral notepad in your glove compartment will suffice. Keep note of the following:

  1. Each trip’s date, mileage, and medical or humanitarian reason.
  2. Any in-kind gifts, such as clothes and household products, are valued at market value.
  3. The money you spend on charity — for example, when you bake for a fundraiser, the cost of your supplies is deductible, but the value of your time preparing is not.

3. MAXIMIZE YOUR IRA AND HSA CONTRIBUTIONS

For the preceding tax year, you have until the filing deadline (unless it is postponed due to a weekend or holiday) to create or contribute to a conventional IRA. This provides you the option of claiming the credit on your return, filing early, and opening the account with your refund. Contributions to a traditional IRA might lower your taxable income. If you’re at least fifty years old, you may reap the benefits of the maximum contribution and the catch-up provision, which can boost your IRA. While contributions to a Roth IRA do not qualify for a tax deduction, if you satisfy the income requirements, you can still take advantage of the beneficial Saver’s Credit.

If you’re self-employed, you have until October 15 to contribute to some self-employed retirement plans, if you seek an extension in a timely manner. If you do not ask for an extension, most contributions must be made by the usual filing date for that year.

Contributions to a Health Savings Account (HSA) before taxes can help you save money on taxes. You have till the deadline to complete them. In order to open and contribute to an HSA, several conditions must be met: You must be enrolled in a health-care plan with high deductibles that meet or exceed the IRS’s minimum requirements. In addition, the plan must set maximum annual out-of-pocket expense caps that comply with the IRS’s restrictions. Different essential tools are available to keep track of these things and to minimize the tax contributions. 

4. KEEP IN MIND THAT, TIMING CAN IMPROVE YOUR TAX REFUND

Look for ways to lower your taxable income by making payments or contributions before the end of the year. Make your January mortgage payment as soon as possible after December 31 to earn the extra interest for your mortgage interest deduction. Plan medical treatments and tests for the fourth quarter of the year to maximize your medical cost deductions. This might be a good moment to give to charity, but make sure it’s a legitimate organization and that you maintain track of your expenses in your records. If you’re self-employed, think about any purchases you’ll have to make that may be deducted. To assist enhance your return, buy items like office equipment and software before the end of the year. If you qualify for the home office deduction, you can also deduct the expense of painting your home office if you want to start the New Year out with a fresh new appearance.

5. BECOME TAX CREDIT SAVVY

Because tax credits are a dollar-for-dollar reduction of your taxes, they generally function better as refund boosters than deductions. If you receive a $100 credit, your taxes will be reduced by $100. When it comes to obtaining tax credits, many Americans leave money on the table. Did you know that 20% of Americans who are eligible for the Earned Income Tax Credit do not claim it? Even if you’re single and have no children, you may be eligible for the EITC if you satisfy the requirements. The highest credit amount for 2021 is $1,502 if you don’t have any eligible children. The maximum credit increases to $6,728 if you have three or more qualified children. If you have children, you should take advantage of the Child and Dependent Care Credit. You may be eligible for important education credits if you’re a college student or supporting a child in college. Up to $1,000 of the American Opportunity Credit is refundable. This means you might get up to $1,000 even if you don’t owe any taxes. Only cash contributed toward eligible undergraduate higher education costs during the first four years of study is eligible for the $2,500 total credit per student.

If you are enrolled in graduate school or higher, you might be eligible for the Lifetime Learning Credit. You may deduct 20% of your allowable expenses up to $10,000, or a maximum of $2,000 per tax return, depending on your income. Tax credits on energy-efficient home improvements can provide year-round and tax-time financial savings. The credit can cover up to 26% of the cost of some qualified energy expenses from 2020 to 2022. The credit drops to 22% in 2023 and then vanishes completely. This suggests that you will receive a total credit of $5,200 in 2021 or $4,400 in 2023 if you spend $20,000 on solar panels. The portion of 2021 that is not used will be carried over to 2022. The carryover has no bearing on the electric vehicle credit, which the IRS will still award in 2021 at a maximum of $7,500 per qualified vehicle, subject to manufacturer sales limitations. The credit starts to diminish after each manufacturer has sold more than 200,000 eligible vehicles.

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