How to Maximize Your Tax Refunds
Almost everyone wants to do everything they can to make sure they get the maximum tax refund possible. Whatever you may feel about paying taxes during the year, no one wants to leave money on the table by failing to claim deductions or credits to which you are entitled.
Here are some tips that you can follow to make sure that you maximize your tax refunds in 2020.
Tax Basics: Types of Income, When Taxes Are, and Other Stuff to Know
Taxes are essentially the fuel that keeps the government – and much of society – running. The Internal Revenue Service (IRS) manages the process of taxation, including interpreting tax rules, enforcing payments and issuing tax refunds.
There are two major types of income for which you are taxed, earned income and unearned income. Some examples of earned income include the following:
- Commissions and bonuses
- Sick pay and unemployment benefits
On the other hand, unearned income includes mostly income derived from other assets. Some major types of unearned income include:
- Profit from selling assets
- Business income
- Rental income
- Spousal support payments
Each person must file an income tax return annually to report their income and the taxes they have paid throughout the year. If they owe more taxes, they will need to pay along with the submission of their tax returns. However, many more people are due a tax refund, especially as most taxpayers have their income taxes deducted every paycheck.
There are several ways to maximize tax refund for the best results.
What is a Tax Refund?
A tax refund is issued by the IRS to all taxpayers who have overpaid over a year. In most cases, taxes are withheld throughout the year based on the filing status that you declared at your job. However, these standard withholdings do not take into account your unique eligibility for credits, deductions or other types of income. As a result, many people pay more in taxes to the state or federal government than they owe.
Many people confuse the terms “tax return” and “tax refund.” You file a tax return each year to document your taxes owed, your remaining liability or the refund you are due. The refund is issued by the IRS, most times as a direct deposit to your bank account. To receive your refund, you must file your annual tax return.
A tax refund is not a bonus or a gift. Instead, many experts refer to it as a sort of repayment of an interest-free loan to the government. Some people may want to change the type of withholding specified on their W-4 form at work to keep more money year-round rather than enjoying one large tax refund.
W-2 vs. 1099 Tax Refunds
Employees of a company receive a W-2 form annually that documents the taxes paid during the year. These documents provide detailed information about your taxes withheld throughout the year. As a W-2 employee, the tax burden is also shared with your employer, which pays payroll taxes, Medicare taxes and Social Security taxes.
On the other hand, a growing number of people are working as independent contractors in the “gig economy.” While doctors, lawyers, accountants and other professionals were long considered self-employed, independent contractors include freelance writers, graphic designers and even dog walkers and drivers.
Each employer that pays you $600 or more each year as a non-employee contractor must provide you with a 1099-MISC. In most cases, information on the 1099 is considered self-employment income.
Employees who receive W-2 forms have taxes taken out of their paycheck all year. It can be easy for W-2 employees to maximize their tax refunds. On the other hand, people who are 1099 contractors must remit their own taxes to the IRS.
They must pay their taxes due when they submit their tax return, or they must split it up into quarterly payments throughout the year. In addition, they usually must also pay self-employment taxes, which contribute to Social Security and Medicare.
Tax refunds are generally linked to W-2 employment, although a 1099 contractor may potentially be able to claim a refund in certain circumstances. For example:
- The contractor also has taxes withheld as part of a regular, W-2 job
- The contractor is eligible for refundable tax credits that exceed liabilities, such as the earned Income Tax Credit, the additional child credit and the tax credit for health coverage.
- The contractor overpaid their personal quarterly amounts to the IRS.
Choosing Your Filing Status
One of the best ways to maximize tax refund is to consider your filing status. Around 96% of married couples file joint returns, but some may want to consider opting for Married Filing Separately status. By choosing to file separately, each partner may have a lower adjusted gross income, used to determine eligibility for some credits. Individual accounting could also boost eligibility for medical credits if one spouse needs significant care. The Child Tax Credit is also available to spouses who file separately.
However, other deductions are designed to be available only to taxpayers who file as Married Filing Jointly. You should take your own eligibility into account when deciding which option is best for you.
Single taxpayers also have options, especially if they care for a dependent, whether a child or an elderly parent. By filing as a Head of Household, you can access a larger standard deduction and more advantageous tax brackets.
Maximizing Tax Deductions
If you want to know how to maximize tax refund, you’ll want to do everything possible to boost your credits and deductions. There are a number of expenses that you can use to lessen your taxable income. These include the following:
- Miles driven for medical care
- Miles driven for charity
- Dollars spent on charity work, including volunteering
- Value of in-kind donation like cars or clothes
While tax deductions are great, tax credits are often even more useful, because they directly reduce your tax bill by the amount specified. However, up to 20% of eligible taxpayers do not claim some of the credits they are due. Tax credits are often introduced and come to an end, so it is important to stay on top of the changes in tax law if you are learning how to maximize tax refund.
Some major tax credits include:
- Earned Income Tax Credit
- American Opportunity Credit
- Child and Dependent Care Credit
- Lifetime Learning Credit
- Credit for Energy Savings
- Credit for Electric Vehicles
Maximizing HSA and IRA Contributions
If you ask, “How to maximize my tax refund?” you can consider planning for your health care and retirement expenses. You can open an IRA for the previous tax year until April 15 of the following year. By contributing to an IRA, you directly reduce your taxable income and save for your retirement at the same time.
When you contribute to a Health Savings Account (HSA), you can reduce your income eligible for taxation as well. These contributions can also be made through April of the following year, and they help people plan to cover future medical costs.
Filing Returns for your taxes – choosing the right accountant
When you want to maximize tax refund, it’s important to make sure your annual tax return is clear, accurate and precise. You also want to ensure that your return is personalized and completed by a knowledgeable preparer.
There are several options when planning to file your taxes: You could use tax software, go to an accountant or connect with an online accountant. Tax software is often programmed to ask you questions to highlight potential credit or deduction eligibility, while accountants are known for their vast knowledge and tax planning options.
After you file your taxes, you can check with the IRS to see if your refund has been issued.
An online accountant at Picnic Tax can offer the best of both worlds, however. You’ll have all the ease and comfort of online tax preparation as well as the personal touch and planning advice of a skilled accountant. When you ask, “How to maximize my tax refund?” you can find a qualified online accountant at Picnic Tax with the answers for you. We also offer clear pricing and a quick turnaround time. Find out more about how we can ensure you get the biggest tax refund you can.