TurboTax: Don't Miss These 5 Hidden Ways to Boost Your Tax Refund
Subscribe: Apple Podcasts | Spotify | iHeartRadio
The federal tax filing deadline for individuals has been extended to May 17, 2021. Quarterly estimated tax payments are still due on April 15, 2021. For additional questions and the latest information on the tax deadline change, visit our “IRS Announced Federal Tax Filing and Payment Deadline Extension” blog post.
For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.
While Americans may disagree on how the government spends their taxes, at tax time, many of us are looking for ways to pay no more than we owe — or even boost our tax refunds. These strategies go beyond the obvious to give you tried-and-true ways to reduce your tax liability.
1. Rethink your filing status
One of the first decisions you make when completing your tax return — choosing a filing status — can affect your refund's size, especially if you're married. While approximately 96% of married couples file jointly each year, a joint return is not always the most beneficial option.
Married Filing Separately status often requires more effort, but the time you invest can offer tax savings — under the right conditions. For example, if one spouse has a lot of medical expenses, such as COBRA payments resulting from a job loss, computing taxes individually might allow for a larger deduction.
The Child Tax Credit is available to separately filing spouses. The credit is $2,000 per child under 17 years old in 2020, and it can now be claimed by a separate filer with less than $200,000 in adjusted gross income (it's $400,000 for joint filers).
Choosing to file separate returns can have its drawbacks, such as losing certain deductions available to joint filers. You'll need to weigh this carefully to maximize your refund potential. Also, both spouses must take either the standard deduction or itemize their deduction. You can’t mix-and-match between the two returns.
Calculating your taxes both ways will point you in the higher refund direction.
When you use TurboTax, we’ll do this calculation for you and recommend the best filing status.
Unmarried taxpayers who claim a qualifying dependent can often cut their tax bills by filing as Head of Household if they meet the requirements.
This filing status enjoys a higher standard deduction and more favorable tax brackets than filing as Single.
A qualifying dependent can be a child you supported financially and who lived with you for more than six months. Or, it can be an elderly parent you supported.
Many taxpayers who care for elderly parents don't realize they can claim Head of Household status. If you provide more than half your parent’s financial support — even if your parent doesn’t live with you — you can file as Head of Household.
2. Embrace tax deductions
Many deductions exist that you may not be aware of, and several of them are pretty commonly overlooked. The deductions you qualify for can make a significant difference on your tax refund. They include:
State sales tax – Using the IRS's calculator, you can determine how much of your state and local sales taxes you can deduct.
Reinvested dividends – This one technically isn't a deduction, but it can reduce your overall tax liability. When you automatically have dividends from mutual funds reinvested, include that in your cost basis. This way, when you sell shares, you might reduce your taxable capital gain.
Out-of-pocket charitable contributions – Big donations aren't the only way to get a write-off. Keep track of the qualified small expenses too, like ingredients for the yummy cake that you donated to the bake sale. You might find yourself surprised by how quickly a few charitable expenditures here and there can add up.
Student loan interest – Even if you didn't pay this yourself, you can take the deduction for it as long as you are the one who is obligated to pay. Under new guidelines, if someone else pays the loan, the IRS views it as if you were given the money and used it to pay the student loan. If you meet all of the requirements then you would be eligible for the deduction.
Child and dependent care – Up to $6,000 of qualifying expenses can be used for the Child and Dependent Care Tax Credit.
Earned Income Tax Credit, or EITC – This credit helps families with low and moderate income levels. It's meant to benefit working families with children. If you have three or more qualifying kids, the credit could be worth up to $6,660 for you for tax year 2020 — and could net you a refund even if you don’t have any tax.
State income tax paid on last year’s return – If you paid money on your state income tax return last year, you can add that to any other state income tax, up to $10,000, and use it as an itemized deduction.
Certain jury duty fees – If your company paid you while on jury duty and your employer required you to hand over your jury duty pay from the court; you can claim the amount that you handed over as an adjustment to your income.
Medical miles – Subject to an overall AGI threshold for total medical expenses and worth 20 cents per mile in 2020. For 2020, the threshold is any qualifying unreimbursed medical expenses that exceed 7.5% of your AGI.
Charity miles – Fully deductible at 14 cents per mile in 2020. So, if you drove 50 miles per week to volunteer for a charity in 2020, that’s an additional $364 deduction:52 weeks/year x 50 miles/week = 2,600 miles you drove in a year
2,600 miles x $0.14/mile = $364
It’s important to keep good records for your deductions especially when you don’t receive some type of receipt as with some charitable contributions and charitable or medical miles. Nothing fancy is required — even a spiral notebook in your glove compartment is fine. Make sure to keep track of:
The date, miles and medical or charitable purpose of each trip
The market value of any in-kind donations, such as clothing and household goods
The dollars you spend in order to do charity work — for example, when you bake for a fundraiser the cost of your ingredients is deductible, but the value of the time you spent baking isn't
3. Maximize your IRA and HSA contributions
You have until the filing deadline (unless it's delayed due to a weekend or holiday) to open or contribute to a traditional IRA for the previous tax year. That gives you the flexibility of claiming the credit on your return, filing early and using your refund to open the account.
Traditional IRA contributions can reduce your taxable income. You can take advantage of the maximum contribution and, if you're at least 50 years old, the catch-up provision can add to your IRA.
Although contributions to a Roth IRA don't give you a deduction, they still qualify for the valuable Saver's Credit if you meet income guidelines.
If you're self-employed, you have until October 15, 2021 to contribute to a certain self-employed retirement plans, provided that you timely file an extension. If you don't file for an extension, the filing deadline for that year is the deadline for most contributions.
Pre-tax contributions to a Health Savings Account (HSA) can also reduce your taxable income. You can make these up until the filing deadline as well. Certain requirements must be met in order to open and contribute to an HSA:
You must be enrolled in a health insurance plan that has high deductibles that meet or exceed the IRS’s required amounts.
That plan must also impose the maximum annual out-of-pocket cost ceilings that meet the IRS’s limitations.
You won’t be able to participate in an HSA if any of the following are true:
You have other “first-dollar” medical coverage
You enroll in Medicare
You are claimed as a dependent on another taxpayer’s return
Read this article to learn more about HSA requirements and how these accounts work.
4. Remember, timing can boost your tax refund
Taxpayers who watch the calendar improve their chances of getting a larger refund. Look for payments or contributions you can make before the end of the year that will reduce your taxable income. For example:
If you can, make January's mortgage payment before December 31 and get the added interest for your mortgage interest deduction.
Schedule health-related treatments and exams in the last quarter of the year to boost your medical expense deduction potential.
This could be the time to make some charitable contributions — but make sure it’s a qualified charity and be sure to keep track of your expenditures in your records.
If you’re self-employed, look at any purchases you’ll need to make that can qualify for deductions. Buy things like office equipment and software before the end of the year to help boost your refund.
If you are able to claim the home office deduction, you can even deduct the cost of painting your home office if you want to start the new year with a fresh new look in your workspace.
5. Become tax credit savvy
Tax credits usually work better than deductions as refund boosters because they're a dollar-for-dollar reduction of your taxes. If you get a $100 credit, you get $100 off your taxes. Many Americans leave money on the table when it comes to claiming tax credits.
Did you know that 20% of eligible Americans don't claim the Earned Income Tax Credit? If you meet the guidelines, you may be eligible for the EITC, even if you're single with no children.
If you have no qualifying children, the maximum credit amount is $529 for 2020.
If you have three or more qualifying children for the maximum credit jumps to $6,660.
If you have kids, it also pays to claim the Child and Dependent Care Credit.
The Consolidated Appropriations Act (CAA) was signed into law on December 27, 2020 as a stimulus measure to provide relief to those affected by the pandemic. For tax year 2020, The CAA allows taxpayers to use their 2019 earned income if it was higher than their 2020 earned income in calculating the Additional Child Tax Credit (ACTC) as well as the Earned Income Tax Credit (EITC).
If you're a college student or supporting a child in college, you may be eligible to claim valuable education credits.
The American Opportunity Credit is refundable up to $1,000. This means you could receive as much as $1,000, even if you don't have a tax bill. The total credit is $2,500 and applies only to funds paid towards the first four years of qualified undergraduate higher education expenses.
If you're in graduate school or beyond, you may be eligible for the Lifetime Learning Credit. For 2020, you can claim 20% of your qualified costs up to $10,000, or a maximum of $2,000, depending on your income.
Tax credits for energy-saving home improvements can also keep more money in your wallet throughout the year and at tax time.
The credit for 2020 through 2022 is up to 26% of the cost of certain qualified energy expenditures. The credit drops to 22% for 2023. That means if you installed solar panels at a cost of $20,000, your total credit is $5,200 in 2020 or $4,400 in 2023.
Any portion unused in 2020 carries over to 2021.
That carryover doesn’t apply to the credit for electric vehicles, but the IRS is still offering up to $7,500 per qualifying vehicle for 2020, subject to manufacturer sales limits. The credit begins to phase out once each manufacturer has sold more than 200,000 qualifying vehicles.
Remember, with TurboTax we’ll ask you simple questions and fill out the right forms for you. We’ll find every tax deduction and credit you qualify for to get you the biggest tax refund, guaranteed.
For more tax tips in 5 minutes or less, subscribe to the Turbo Tips podcast on Apple Podcasts, Spotify and iHeartRadio
Brought to you by TurboTax.com
Source: Read Full Article