Eight tax tips to maximize your tax return
It’s time to file taxes and it’s important that you take advantage of everything possible to maximize your return.
The U.S. tax code is so complicated that there are many places to look to see if you might be able to squeeze a few more dollars out of your taxes. A professional tax preparer can be your partner in digging into all the corners of the tax code to make sure you’re getting the most out of your filing. Here are eight tips to maximize your return.
1. Take all possible deductions chances are you’re among the 90% of households in the U.S. that take the standard deduction on your income taxes instead of itemizing. But if you do usually itemize or aren’t sure which is best for you, consider whether you can increase your deductions by moving some of your payments to an earlier date. For example, if your estimated state income tax bill is due January 15, you can send it in before December 31 and deduct it from this year’s return. The same goes for property tax bills unpaid in January and medical bills that you can pay before the end of the year. The standard deduction for 2020 is $12,400 for single taxpayers or $24,800 for those married filing jointly. You should consider itemizing if your itemized deductions can be pushed up above these limits. However, one caution is that if you are subject to the alternative minimum tax (AMT), speeding up your deduction-qualifying payments can cost you money.
2. Making charitable contributions before the stroke of midnight on December 31st is another way to increase your deductions on your tax bill, which, as stated above, is mostly only applicable if you are going to itemize. If you donate money in a given tax year, you’ll deduct the amount you have given from your income. If you donate furniture, clothing, or kitchen items, you deduct the goods’ “fair market value.” Taxpayers can only deduct charitable contributions up to 60% of their adjusted gross income. Don’t forget record-keeping: If you deduct a contribution of $250 or more, you need the organization to provide a receipt to keep in your records. Bigger-ticket items that value more than $500,000 will require an appraisal. In addition to reducing your taxes, charitable contributions can help you do good in the world. That’s something you can’t quantify in any bill.
3. Defer some of your income; why pay today what you could put off until tomorrow? Some taxpayers may be in a position to postpone receipt of some income into the next tax year, which is an excellent way to lower your tax burden this year. Self-employed people are more likely to be able to do take advantage of this particular trick. They can delay sending invoices due at the end of the year until the beginning of the new year. Or they can push off plans to take capital gains into the new tax year. Employees may be able to ask for their year-end bonus to be delivered in January. It can be challenging to take advantage of this option due to the regular wage and salary payment schedule. Keep in mind that this tactic is only worth considering if you are likely to be in the same or a lower tax bracket next year. The best strategy is to pay as much tax as possible in the year in which you’re in the lower bracket.
4. Offset taxable gains since capital losses offset capital gains in your taxes dollar-for-dollar; selling investments at a loss can wipe out your tax bill on your profits for a year. This method of strategically selling assets like stocks and mutual fund shares that have fallen below your purchase price — resulting in a loss — is known as “loss harvesting.”It may seem strange to sell your investments at a loss purposefully, but there’s a method to this madness. Harvesting your losses allows you to reduce your tax bill on your gains, providing a financial advantage at tax time. You can even sell so many investments that your losses get bigger than your gains. In that case, you can use up to $3,000 of those extra losses to reduce your taxable income by the same amount. If you have losses that amount to more than $3,000, you can carry the amount of excess loss above $3,000 over to the next tax year.
5. Spend your flexible spending funds: Many employers offer their workers the ability to pay into flexible spending accounts (FSA), which allows them to spend on life essentials like child care or medical bills with pre-tax dollars. The money you’ve allocated is put directly by your employer into an FSA account, which you can use to pay providers now. The main disadvantage with these types of accounts is that you must decide how much you’ll set aside in the account each month at the beginning of the year, and if you don’t use all the money you’ve allocated by the end of the year, you lose it. Well, that’s usually the case anyway, but due to Covid, a new rule allows employers to let employees roll over unused amounts into 2021 and even 2022. In most years, having money in your account at the end of December should prompt a run to the drug store for supplies or some last-minute doctor or dentist appointments. You can leave the money this year, but make sure you’re not building up too much to spend reasonably over the next year or two.
6. Top up your retirement accounts: Retirement contributions constitute a significant source of deductions on your tax returns. It’s a good idea to contribute as much to your tax-deferred retirement accounts as possible in any given tax year. The most common type of retirement account is the 401(k), an employer-sponsored retirement account into which they put some of your money pre-tax every month. The maximum allowed contribution to an IRA is $19,500 for 2020, or $26,000 if you are age 50 or over. If you cannot contribute that much, try to at least max out any employer match option. The IRS permits taxpayers to deduct contributions in a taking year made on or before the April 15 filing deadline for that year. Self-employed people don’t have access to an employer’s 401(k) plan. Still, they might instead consider contributing to other tax-deferred retirement savings options like a SEP IRA or a solo-401(k).
7. Make an extra mortgage payment: About 13.8 million taxpayers were eligible for a mortgage-interest deduction in 2018, even though the tax bill passed in 2017 reduced the number of homeowners who could take advantage of this option. If you are a homeowner and are still eligible for the deduction, you can get a deduction to offset your taxes by making an extra mortgage payment by Dec. 31. This option has some limitations: Homeowners who bought their home after December 15, 2017, can only write off interest on up to $750,000 in loans.
8. Change your filing status: The IRS lets taxpayers choose one of five filing statuses: single, married filing jointly, married filing separately, head of household, and qualified widow(er) with dependent child. Whatever your marital status is on Dec. 31 qualifies as your status for the entire year.
Which status you choose can affect your tax return. While most married couples file jointly, it may not be the most advantageous option. Under certain conditions, such as if your spouse has a lot of medical expenses, it may make sense to separate your tax filings. Unmarried taxpayers who have dependents might be able to save some money by claiming head of household status.
If you care for elderly parents, you can claim this, providing more than half of their support, even if you don’t live with them. It’s best to consult a tax professional to figure out which filing status is best for you and how you can maximize your deductions. CPAs and EAs are trained to run scenarios to help you figure out the best way to approach your unique filing situation.
Taxfyle can help you connect with an experienced and licensed CPA professional to file your taxes. We’re a one-stop online tax service with a deep network of U.S.-based CPAs and EAs ready to assist.