6 ways to boost your tax refund
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If you’re worried you won’t be getting a big tax refund, you’re not alone. According to the IRS, the average size of tax refunds is down by 8.4% so far this year. However, there are steps you can take to boost your tax refund this year or set yourself up for a bigger refund next year.
Here are six ways to boost your tax refund.
If you aren’t withholding enough money from your paycheck, you could receive a smaller refund or even end up owing the IRS. To make your tax refund larger, you can reduce the number of allowances you claim on your W-4, the form that tells your employer how much to deduct from your paycheck for taxes. (Not sure how much to set aside? Learn to use the IRS withholding calculator.)
In fact, it’s a good idea to review your allowances any time you have a major life event — such as getting married or divorced, having a child, or getting a second job — to ensure you’re withholding the right amount.
Remember, reducing your allowances will increase the taxes withheld from your pay, so while you may get a bigger refund, you’ll see smaller paychecks throughout the year.
When preparing your tax returns, there are five options for filing status: Single, Married Filing Jointly, Married Filing Separately, Head of Household and Qualified Widow(er) with Dependent Child. Choosing the right filing status will help you reduce your tax obligations and get a bigger refund.
For example, in rare situations some married couples are better off filing separately, such as when one spouse has many out-of-pocket medical expenses. To be sure, you can prepare your tax returns several ways to see which filing status gets you the biggest refund.
The IRS has dozens of tax credits and deductions you can claim to reduce your tax liability. Credits are subtracted from the amount of taxes you owe for the year, while deductions are subtracted from your income before calculating your taxes.
“So make sure you take the time to see if you’re eligible for any tax credits such as the Earned Income Credit for taxpayers with low-to-moderate incomes. If you have children, you might be eligible for the Child Tax Credit or the Child and Dependent Care Credit. If your kids are college-age or you have education expenses of your own, you might be eligible for the Lifetime Learning Credit or American Opportunity Tax Credit,” said Josh Zimmelman, owner of Westwood Tax & Consulting.
Make sure you know all the credits and deductions available to you. When it comes to deductions, remember that you can only choose the standard deduction or itemize your deductions. You can’t do both. You should only itemize your deductions if they are greater than the standard deduction.
“The new tax bill nearly doubled the standard deduction compared to past years. If you have a lot of expenses, it may make more sense financially to itemize your deductions, but if your deductions are minimal and you’re looking to make your tax return quicker and easier, then the standard deduction is the way to go,” said Zimmelman.
Contributing to a traditional retirement plan like a 401(k) or individual retirement account can help increase your refund because you won’t owe taxes on those contributions. Any funds you put toward a traditional 401(k) or IRA are tax-deferred until you withdraw them in retirement.
You still have until April 15 to contribute up to $5,500 to a traditional IRA and reduce your tax liability for the previous tax year (make sure to let your financial institution know which year you want the contributions applied to). For 2019, the annual contribution limit is increasing to $6,000.
“The last day to make a retroactive contribution to a traditional IRA or Roth IRA is April 15th. You can make deductible prior-year contributions up until the tax filing deadline, as long as your total contributions aren’t over your annual maximum,” said Zimmelman.
Does your employer offer tax-advantaged programs to help you pay for common expenses? If so, you need to be participating. Flexible spending accounts let you pay for eligible medical expenses tax-free, and commuter programs let you pay for things like public transportation or parking with pre-tax contributions.
If you have a high-deductible health plan, you can enroll yourself in a health savings account, which is similar to a FSA but also earns interest and can be rolled over year to year.
Having trouble with your tax returns? Consider hiring a professional tax preparer. Tax pros can help you identify tax credits and deductions, provide advice on limiting your tax obligations throughout the year, and help you secure the biggest refund you can.
A smaller tax refund isn’t necessarily a bad thing. When you get a tax refund, it means you’ve overpaid the government over the course of a year. Essentially, you let the government hold onto your own money for you interest-free. You might want to forgo a big refund and pursue a bigger paycheck instead, and use that additional money to pay off debt, save an emergency fund or invest.
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