The beginning of another year is here… and that means that we are entering into tax season. Since it’s something that you have to deal with, you may as well try to get back the most money possible—money that can be used to take a vacation, save for retirement, or even pay down debt and increase your credit score. Here are some tips to get a bigger tax refund this year.
This post is sponsored by CreditRepair.com. All opinions are mine alone and are honestly conveyed.
What is a tax refund?
Throughout the year, you are paying in on your estimated tax bill. If you are employed by someone other than yourself, you receive paychecks that have taxes already withheld. If you are self-employed, you probably make quarterly payments throughout the year. Either way, your actual tax liability isn’t known until you file your taxes. There are many things that can impact what you will actually owe, including additional income that hasn’t been taxed, less income than anticipated, or the ability to write-off certain deductions.
After all income, deductions, and credits have been calculated, if you ended up paying in too much, the government must issue a check back to you for that overpayment—and this is your tax refund. Because nobody wants to overpay in taxes, it is helpful to know what items you can legally deduct from your tax obligation or what credits you may qualify for.
**Of course, you should always consult a tax professional regarding your specific tax situation and how any credits, deductions, or additional income may affect your tax obligation.
Tax credit vs. tax deduction
In order to get the biggest refund possible, you will need to take a look at your entire financial situation with a tax professional and decide if there are any tax credits or tax deductions that you qualify to take. So what exactly is a credit and what is a deduction? How do I qualify for them? And how do they affect my overall tax obligation?
What is a tax credit?
Tax credits provide a dollar-for-dollar reduction of your income tax liability. For example, if you qualify for the maximum amount of the Earned Income Tax Credit for 2019, which is $6557, it would directly reduce the amount of taxes you owe the federal government by $6557.
Common Tax Credits that you may qualify for
These are five of the most common and largest tax credits. Depending on your current expenses and financial situation, these may help save you a lot of money if you qualify for them:
- Earned Income Tax Credit
- Child and Dependent Care Credit
- Lifetime Learning Credit
- American Opportunity Tax Credit
- Savers Tax Credit
What is a tax deduction?
Tax deductions lower your taxable income and are equal to the percentage of your marginal tax bracket. An example here would be: if you are in the 24% tax bracket, a $1,000 deduction saves you $240 in tax. So, deductions will help to reduce the overall taxes that you owe, but only in part.
Standard Deduction Amounts for 2019:
- married filing jointly—$24,400
- single taxpayers and married individuals filing separately—$12,200
- heads of households—$18,350
Because the standard deductions have increased over the last couple of years, you may or may not be able to deduct some of the items that you used to. However, you should keep track of items such as mortgage interest that you paid throughout the year, work expenses that are not reimbursed, and charitable contributions, just in case they add up to more than your standard deduction. These expenses, as well as other business expenses, are especially important to track if you are self-employed. If the standard deduction is larger, you would use that. If your itemized deductions add up to more than the standard deduction for your filing status, then you would use those.
Related article: The Best Online Tax Prep Software for 2020
Get a tax break with pre-tax contributions
There are certain things that you can do that also reduce your tax, but aren’t a direct credit or deduction—so it won’t actually give you a bigger refund, but it will give you more money in your pocket throughout the year! These items are taken out of your paycheck pre-tax, which means that this money comes out of your paycheck before taxes are withheld. Two things that you should be contributing to pre-tax are: an HSA or flex spending account and an employee sponsored 401k plan.
Taking advantage of this type of tax break is kind of like giving yourself a raise. For instance, if you are in the 22 percent tax bracket, and you know that you are going to have $1000 of medical expenses this year, putting that $1000 into an HSA gives you access to $220 more than if you had to pay tax on the money, then use your net paycheck to cover the costs. Keep in mind that you can use your HSA and flex spending money on things such as payments for your kid’s braces, prescription drugs, over-the-counter medicines, and prescription eyeglasses. So, this pre-tax money can be used on way more than just doctor appointments with your primary care physician.
Review your tax filing status
Are you filing your taxes correctly? If not, I could be costing you money. Most people have heard of filing as an individual single taxpayer or married filing jointly. However, you may want to talk with your tax professional to see if changing your tax filing status to head of household, married filing separately, or qualifying widow(er) with a dependent child would be more beneficial to your financial situation.
Tax brackets for 2019:
Per the IRS website, here are the inflation-adjusted tax brackets for 2019:
- 37 percent for individual single taxpayers with incomes greater than $510,300 ($612,350 for married couples filing jointly).
- 35 percent, for incomes over $204,100 ($408,200 for married couples filing jointly);
- 32 percent for incomes over $160,725 ($321,450 for married couples filing jointly);
- 24 percent for incomes over $84,200 ($168,400 for married couples filing jointly);
- 22 percent for incomes over $39,475 ($78,950 for married couples filing jointly);
- 12 percent for incomes over $9,700 ($19,400 for married couples filing jointly).
- 10 percent for incomes of $9,700 or less ($19,400 for married couples filing jointly).
Related article: 7 Things You Don’t Want to Forget When Filing Your Taxes
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