How to Actually Get the Most Out of Your Refund

Tax season is officially here and tax preparation services are hard at work to make sure you know just how much money you can save if you file your returns with them – and how much money you may stand to lose when you work with the “other guy”.

Understandably, most taxpayers are not experts in the tax code or the most recent changes in laws that affect how much money they receive in their refund, so making an “informed” decision about how to get the most out of your tax deductions and into your refund is difficult.

Even the massive tax reform in 2017, which tried to make tax filing easier to understand and simpler for a taxpayer to do themselves, left many taxpayers more confused than ever.

The truth is, whether you use an online tax preparation software to “do-it-yourself” or hire a CPA, it is in your best interest to know which deductions you are eligible for and make sure you receive your money from the government.

When it comes to filing your taxes, words like “Deductions” and “Tax Credits” are thrown around as if they’re common knowledge, but many people don’t fully understand what they mean or what are the differences (and benefits!) between the two.

Tax Credits

Tax credits were created as an acknowledgement of the required expenses that people must make throughout their year that will greatly affect their financial situation. In certain situations, the government will “credit” your tax liability which saves taxpayers thousands every year.

A tax credit will actually reduce the amount of tax you owe and gives you a dollar-for-dollar reduction for your tax liability.

This means that if you are eligible for a $1,000 tax credit, your tax liability will be reduced by $1,000.

What is Considered a Tax Credit?

Just like deductions, there are hundreds of different types of tax credits that you can take advantage of including Child Tax Credit, Earned Income Tax Credit, and Saver’s Credit.

Tax credits can change every year, which is why it is important to stay on top of the credits that can be applied to your taxes. As your situation changes, your eligible tax credits and deductions will change as well!

Deductions

“I’ll pay for lunch; it’s a tax deduction.”

If you’ve ever heard of someone casually mention their ability to receive a tax deduction on a purchase, you may be wondering why you haven’t been able to cash in on these elusive money-savers.

A tax deduction reduces how much income is subject to be taxed by the government. Let’s say you have $1,000 and are subject to a 10% tax, you will pay $100 to the government. However, if with your $1,000 you made a tax-deductible purchase of $200, then your taxable income would be lowered to $800 and you would only be required to pay $80 in taxes – a savings of $20.

So, what is considered a deduction?

There are hundreds of deductions that are available, but just because the IRS offers a deduction doesn’t mean that you qualify to benefit from it.

Popular deductions include medical expenses, charitable donations, mortgage interest, and Self-employed expenses deductions. If you are considering using deductions this tax season to save big on your refund, it may be worth the money to invest in a professional to assist you. They will be able to let you know how many of the hundreds of available deductions you can take advantage of and help you get your biggest possible refund.

Standard or Itemized Deduction

There are two ways that you are able to claim tax deductions: you can either take the itemized deduction or the standard deduction. Unfortunately, if you are looking to cash in on some deductions, you’re required to choose which way you would like to claim your deductions; you can’t claim deductions both ways in one tax year.

Standard Deductions

The IRS offers hundreds of tax deductions which can be difficult for the average taxpayer to navigate. Instead, there is an option to claim a “standard” deduction which allows a taxpayer to receive a large deduction without going through each and every type of deduction they may be eligible.

A standard deduction is a flat rate which is dependent on your filing status.

Filing Status

Single

Married, Filing Jointly

Head of Household

2019 Tax Year

$12,200

$24,400

$18,350

2020 Tax Year

$12,400

$24,800

$18,650

2019 Tax Year

Single

$12,200

Married, Filing Jointly

$24,400

Head of Household

$18,350

2020 Tax Year

Single

$12,400

Married, Filing Jointly

$24,800

Head of Household

$18,650

Itemized Deductions

Itemizing your deduction can sometimes yield more money than claiming the standard deductions, but there is a significant more work that must be done to do so.

It may take a tax preparation professional to help determine which deductions you are eligible to apply for, but the work does not stop there.

You must be able to prove each and every deduction you claim; which means your friend who claims that your lunch would be a tax deduction better be able to prove that that lunch was a deductible expense.

There are plenty of grey areas when it comes to claiming itemized deductions it is often encouraged to hire a professional who will be able to fully navigate all your claims for you.

Getting the Most Out of Your Refund

There are some common and not so common deductions to keep in mind. Here are a few of those deductions that may not come to mind when gathering your tax information (remember, a tax credit is essentially dollar for dollar savings, and a deduction simply reduces taxable income, and will lower the tax bill, but only by a percentage of the total):

If you have children under the age of 17, then you’re potentially eligible for a credit of $2,000. Or if you have another dependent, or children over 17 and, then you’re potentially eligible for a credit of $500. You may also be eligible for a dependent care credit if you paid qualified childcare expenses. If your child is in college, then you will also want to keep careful track of the amount they have spent on qualified expenses, such as books, tuition, and other materials and costs. This is a big area of possible deductions that may require some additional resources and research.

You will want to do some digging on the requirements for this credit. There are many people that don’t even know if they qualify for this credit when it can provide a tremendous amount of assistance. If the tax service or software you use does not help you determine this, look into it on the IRS website (see below to hear why the IRS website is not as scary as it looks and sounds). Some important things to know here are if you are a low income earner, or a major life event occurs, such as losing a job, then you will want to look into your eligibility. This is also a refundable credit, which means that you will get money back, even if you don’t owe any tax. But you need to file a tax return to claim this.

This is a deduction, but very important to capture, especially in the early years of repaying student debt. You will have,  or should receive a Form 1098-E that will give you this amount. You will be able to deduct up to $2,500 on your taxes.

This is a big buzz word in the world of preparing taxes. A lot of people won’t fall into the category of being able to itemize. This is due to the greatly increased standard deduction. However, if you are able to itemize, the types of expenses you’ll want to keep track of or gather together are, interest paid on a mortgage, real estate taxes, charitable contributions (don’t forget this includes clothes and other physical donations), state sales tax (generally more beneficial in states where there is no income tax), and medical expenses (keep in mind that this total amount will need to be greater than 10% of your adjusted gross income; which is a fancy way of saying your income after certain deductions).

Pay close attention to re-invested dividends (these will increase your basis in relevant stock; if you’re unsure of what any of that means, then don’t worry about it. If you have investments and don’t know about this, then you should talk to your advisor, and they should be able to clearly explain what this means, and be held accountable for properly tracking basis). You may also be able to claim some moving expenses if you moved for work this year, and moved more than 50 miles for the job (there are more caveats to this, so do some digging).

So, make sure you cross your T’s and dot your I’s this tax season. Your biggest refund ever could be right around the corner!

Qualify today for a Fresh Start

Learn how easy it is to qualify for tax savings.

Qualify today for a Fresh Start

Learn how easy it is to qualify for tax savings.

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