No one wants to owe Uncle Sam come tax season — and if you’re the looking for the quickest way to ensure a refund, you might want to simply increase your withholding each month. You can do that by filling out a new W-4 form with your employer. Still, even if you suspect you’ve kept your interest-free loan to the government slim over the course of the year, there may be ways to boost your refund. If you’re looking to maximize your tax refund come April 15, check out these tips.
1. Know Your Deductions & Your Exemptions
An exemption is money you earned but aren’t required to pay taxes on, while a deduction lowers your taxable income. Both can reduce the amount of money you owe Uncle Sam each year and help you score a bigger refund. That’s why it’s important to know which ones you are eligible for. We’ll cover a few common ones below, but you can find a longer guide to deductions and exemptions here.
2. Build Your Retirement Savings
Contributing to a 401K plan offered by an employer is a nifty way to shield income from taxes and build up savings for the future. Making contributions to an individual retirement account works, too. With a traditional IRA or a 401K plan, your contributions are made with pre-tax dollars, which helps lower your taxable income for each tax year you contribute to the plans.
3. Pay for Medical Expenses With a Flexible Spending Account
A flexible spending account (FSA) allows you to set aside part of your salary on a pre-tax basis for medical expenses and for child and dependent care. Many employers offer FSAs, and they can be a valuable tool for lowering your tax bill by shielding the money you pay for medical and child care expenses from taxes.
4. Deduct Medical Costs
Get a tax deduction for all the medical bills you’ve paid in the previous year. Medical expenses include health insurance premiums, dental care, eye care and glasses, mental health counseling and driving to and from doctor visits and other medical appointments. For the 2016 tax year, qualified medical expenses that exceed 10% of your adjusted gross income (AGI) can qualify for a deduction, unless you are age 65 or older, in which case the threshold is 7.5% of AGI.
5. Make Charitable Donations
Clean out the closets, donate an old car instead of trading it in at the dealership, make financial contributions to your favorite charities — all these things may be tax-deductible. Giving to charities can help trim your tax liability and boost the amount of any refund coming your way. Make sure you give your donations to a qualified charity and keep good records. You’ll need to itemize your charitable donations on a 1040 tax return using Schedule A.
6. Consult a Professional
If your tax returns are getting increasingly complicated and you suspect you’re leaving money on the table, it may be time to get help. There are plenty of professional tax preparers out there, including certified public accountants and tax attorneys. If you do decide to go pro, be sure to vet any tax preparer you are considering properly. The Internal Revenue Service has some tips for doing so on its website.
Frequently Asked Questions
Now that you’ve learned how to beef up your refund, here are a few commonly asked questions.
How Do Tax Returns Work?
We get it — paying taxes is confusing. However, you need to know how it all works. Various factors affect how you are taxed, as well as how much you’ll end up paying the government or receiving from a refund. Put simply, the amount of income tax you owe each year is determined by your income level. The U.S. uses what’s known as a progressive income tax system, meaning the more you earn, the more taxes you’ll pay. Most people participate in the “Pay-As-You-Go” system, which means they have income tax deducted from each paycheck, which goes to the IRS (also known as withholding). When the year ends, if your payments did not cover your income tax due, you must pay the difference to the IRS. Conversely, if you paid too much over the course of the year, you will receive a refund.
Depending on your status (resident, nonresident alien, etc.), you will need to file a federal income tax return, which will help determine how much you owe in federal income tax. State income taxes, which are levied by each individual state government, need to be filed separately.
Do Tax Deductions Increase Your Refund?
As the IRS points out on its website, a tax deduction will not provide a dollar-for-dollar reduction of your income tax liability. This is what a tax credit does. So if you receive a $1,000 tax credit, for instance, you will save $1,000 in taxes. A tax deduction lowers your taxable income and is equal to the percentage of your marginal tax bracket. It may increase your refund and can reduce the amount of tax that you owe. Just make sure you’re eligible to claim it before you mark your income tax return.
How Do You File Your Taxes?
There are plenty of ways to file your taxes, including hiring an accountant or using a free service such as TurboTax, efile.com or the Free File Fillable Forms offered by the IRS. According to the IRS, 70% of all taxpayers are eligible to file their taxes free, so it’s worth looking into your options. You can check out our ultimate guide to filing your taxes for free right here.
How Do Income Tax Deductions Work?
As we mentioned above, an income tax deduction lowers your taxable income. There are two main types of tax deductions, the IRS says, the standard deduction and itemized deductions. Taxpayers must use one or the other, and the IRS notes it’s “generally recommended that you itemize deductions if their total is greater than the standard deduction.”
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This article has been updated. It was originally published January 30, 2017.