The 2020 tax season was anything but normal due to the impacts of COVID-19. However, one thing remains certain: tax day is not typically looked forward to by most Americans - though if you are lucky enough to get a tax refund check, it may bring a smile! Many questions come to mind, such as: How much will I owe? Will I get a refund? And perhaps most importantly: “How can I get the most out of my return?”
Let’s be honest, we’re all looking for ways we can reduce what we owe. But, minimizing what you owe and maximizing on your tax return isn’t just about finding credits or reducing your income. In fact, there are several ways that you can maximize your tax return without investing extra time, energy, or money. Let’s see how!
Before we jump in, there’s one thing you should know: this information is for educational purposes. Please consult a tax advisor for all the details.
1. Confirm your filing status.
There are five primary filing statuses, and they’re all pretty self-explanatory: single, head of household, married filing jointly, married filing separately, and a qualifying widower. However, since a few of them could apply to your situation, you’ll want to choose the one that benefits you the most. Before you file, be sure to double-check your numbers and see what works best for you.
The most common comparison is married filing jointly vs. married filing separately. In most cases, married couples would want to file jointly so they can take full advantage of deductions available to joint filers, but this isn’t always the case. If one spouse has high medical expenses and the other has none, it may be smart to crunch the numbers separately. Keep in mind that as a married couple, if one of you chooses to itemize deductions rather than the standard deduction, the other must itemize as well, even if you are filing separately.
For those who are single with a dependent (this could be a child or even a parent you care for), you might be able to file as Head of Household instead of single if you also pay for more than half of the household expenses. This filing status comes with its own set of benefits, so it’s worth running as a second scenario to see if it works in your favor.
2. Itemize your return.
The new tax laws of 2018 brought a lot of changes. One of the most notable differences was that the standard deduction almost doubled, replacing a number of other deductions that once existed. Today, the standard deduction for single filers is $12,200. Married filing jointly is $24,400, and according to the IRS, is the way that about 90 percent of the populace will file.
If you choose to itemize instead of taking the standard deduction, it’s worth noting that itemizing your tax return can have huge implications — especially if you made sizable charitable donations or had significant healthcare or medical expenses during the year. In those cases, itemizing out the costs may play into your favor far more than the standard deduction. If you’re not sure which filing option is best, it’s always worth your time to do a quick comparison.
3. Find deductions and credits.
Deductions and credits are the first things people think about when it comes to maximizing their tax return — for good reason. The opportunities for tax deductions and tax credits are plentiful and often based on something you’re already doing. The key is to make sure you’re capitalizing on those actions. And while they may have a similar impact on your tax return, deductions and credits are two very different things. It’s important to understand the difference.
What is the difference between tax deductions and tax credits?
A tax deduction is something that reduces your taxable income, which not only affects the total amount you owe but may also slide you into a different tax bracket. This means that the percentage of tax you owe may also be reduced. But deductions are also calculated on that percentage, so if you are in a 25% tax bracket and have a $2,000 deduction, you’ll see that show up as an actual monetary reduction of $500.
In contrast, a tax credit reduces the amount of taxes you owe on a dollar-by-dollar basis. Rather than being affected by percentages, a $1,000 credit reduces your tax liability by $1,000.
What are some of the most common tax deductions?
- Mortgage interest - interest paid on mortgage payments
- Medical expenses - a percentage of the money you spend on qualifying medical expenses. (Mileage counts, too!)
- Home office or office supplies - for self-employed individuals claiming a home office
- State income taxes paid - for the year prior
- Student loan interest - paid on qualifying student loans
- State sales tax paid
- Charitable gifts and donations
What are some of the most common tax credits?
- Non-child dependents - up to $500 for qualified dependents
- Child tax credit - $2,000 per child under the age of 17
- Child and dependent care - up to $6,000 of qualified expenses (child care, tuition, etc.)
- Earned income tax credit - for low and moderate-income levels and families with three or more qualifying children, this credit could be worth up to $6,557
Can I take deductions if I didn’t itemize my return?
Generally, no. However, you may qualify for something called “Above the Line” tax deductions. Typically reserved for interest paid as well as out-of-pocket expenses spent toward your job, these deductions reduce the amount of taxable income without itemizing — and the best part is tracking them doesn’t require a lot of bookkeeping.
Here are a few of the most common Above the Line deductions you might qualify for:
- Educators expense
- IRA deductions
- Health Savings Accounts
- Moving expenses for Armed Forces
4. Add to your retirement.
Did you know the government would give you credit for putting your money away for the future? It’s true! When you contribute to an individual retirement account (IRA), you can get a deduction of up to $6,000 per year. (Individuals over the age of 50 can claim up to $7,000.) But that’s not all. Uncle Sam also allows a “saver’s credit,” which offers $1,000 back (or $2,000 for married couples) if you contribute to your IRA. It’s a smart way to maximize your return and your retirement funds at the same time.
5. Give more.
Charitable donations aren’t just calculated by how big of a check you wrote to your local non-profit; even the cake you made for Johnny’s bake sale can qualify (as long as you keep the receipts). Additionally, any miles you drove on behalf of charity work (like Meals on Wheels or disaster relief efforts) qualify for a deduction, as does the market value of in-kind donations to charities. For any of these, make sure you keep clean records so you can prove when and where and for whose benefit you donated your time and resources.
6. File on time.
Although the deadline for your 2019 tax return seemed to be a moving target due to the impact of COVID-19, the 2020 tax season should return to normal. This means that your tax return must be postmarked or electronically filed by April 15, 2021, to be considered “on time.” If you absolutely can’t get your taxes done before that date, make sure you file for an extension by that date instead — a move that will give you an extra two months, until June 15 — but note: you’ll still owe interest on any tax that was owed by April 15 and not paid at that time.
7. Check the numbers.
It may seem like a no-brainer, but mistakes on your tax return can cost you. Even if they are unintentional, you can owe interest and penalties on any amount considered “unpaid.” Make sure that you include all income — even that which you may not have received paperwork for (i.e., a 1099 for independent work as a contractor or income from interest).
Tax returns don’t have to be very complicated, but as with most things involving the government and money, it’s not something you want to make a mistake on. For your best interest, consult with an accountant or tax preparation service that can double-check your return for missing credits and missing income. This will not only help you maximize your return but also keep you from accidentally getting into hot water.
If there’s any way that Spero can help — be it creating a budget that includes tax savings or starting a sinking fund for a large annual tax payment — please let us know! Our member representatives are always here to help you maximize your return as well as your financial future.
This material is for educational purposes only and is not intended to provide specific advice or recommendations for any individual. Please consult a tax advisor.