How to Maximize Your Tax Refund
You might be under the impression that what you owe to the IRS is predetermined with no wiggle room, but that couldn’t be further from the truth.
By learning how to maximize your tax refund, you can save thousands of dollars over the course of your lifetime. Let’s take a look at some refund-optimizing strategies.
Claim State Sales Tax Paid Versus State Income Tax Paid
If you itemize your deductions using Form 1040 Schedule A, then you’ll have a refund-optimizing choice to make: You can either deduct the local income taxes you paid for the year or deduct the local sales taxes you paid for the year. Most people choose to go with the local income tax deduction. However, if you spent a decent amount of money throughout the year (or had large purchases such as new appliances or a car), then you may want to take the sales tax deduction. Use an optimizing calculator to help you decide which deduction to take.
Choose the Most Advantageous Filing Status
If you’re legally married on December 31, then you have the choice of filing your taxes as married filing separately (two returns) or married filing jointly (one return). One status might give you a marriage penalty while the other could give you a bonus.
- Example of a marriage penalty: A couple who earns about the same income may incur a marriage penalty because filing as a household pushes their income into a higher tax bracket.
- Example of a marriage bonus: A couple with one person earning significantly more than the other will likely enjoy a marriage bonus. This is because part of the higher income earner’s income will be pushed into a lower tax bracket.
The best way to find out which status will give you more of a tax advantage is to explore the outcome of different filing statuses using a federal income tax calculator.
Prepay Next Year’s Bills
There are a few bill prepayments you can make at the end of a year to increase your deductions. Two for itemizing homeowners include:
- Mortgage interest: Your January 1 mortgage bill represents interest charged in December. Pay January’s bill by December 31 so that you can deduct that payment’s interest.
- Property taxes: If your property taxes are due early in the next year, then pay it by December 31 to deduct twice as much for the year.
Do a Little Pre-Planning
Certain scenarios can be planned ahead of time for tax optimization. These include:
- Having a child at the end of the year: It turns out that, as far as child tax credits are concerned, it doesn’t matter if your child is born January 1 or December 31 — the credit is yours. So to maximize your return during the first year while minimizing your childcare costs, plan to have your child toward the end of the year.
- Batching medical procedures/surgeries: Did you know that medical expenses exceeding 10 percent of your adjusted gross income can be deducted? So it can be helpful to have multiple medical procedures or surgeries that you know you need in the same year at once. It’s also likely that you’ve met your insurance deductibles by the end of the year, so take advantage before the January 1 deductible reset.
- Choosing a state with low or no income tax: Feeling adventurous? Moving to a state with low or no income tax will save a lot of money off of your tax bill.
Mastering how to maximize your tax refund can take some pre-planning. You may not have all your ducks in a row to be able to take advantage of these strategies this April, but start to keep these ideas in mind so you can do what’s needed in order to enjoy a larger tax refund in upcoming years.