While most Americans file their return, or use a professional, and hope for the best, there are steps you can take to ensure you're maximizing your tax return. Gather your paperwork, grab a seat, and follow along as we go over the top tips for maximizing your return when you file your taxes this year.
Strategy 1: Use Applicable Tax Credits
Applying tax credits to your return is the most effective way to lower your tax burden. Tax credits directly subtract money from the amount that you owe in taxes. Some tax credits are even refundable, meaning that if you have more in credits than you owe, the remaining balance is added to your return.For example, if you owe $5,000 to the IRS but you have $1,000 in tax credits that apply to your filing situation, you’ll only end up owing $4,000.
Some of the most common tax credits for 2018 include:
The Child and Dependent Care Credit
If you have a child who is under the age of 13 and you paid to have someone take care of him or her while you attended school or work, you may be eligible for the child and dependent care credit. The Child and Dependent Care Credit allows you to reduce your tax burden by up to $1,050 for a single child and $2,100 for two or more dependents, if you qualify.
The Earned Income Tax Credit
The Earned Income Tax Credit is one of the most lucrative credits written into the tax code, but according to the IRS, it’s also the most often-missed; about 1 in 5 Americans eligible for the credit do not claim it. This credit is aimed at helping lower-income taxpayers keep more of their money. If you earn less than $49,078 from wages, self-employment or farming, you qualify for up to $6,242 in credits depending on your income and the number of dependents you support.
The American Opportunity Tax Credit
The American Opportunity Tax Credit is for men and women who pursued some form of higher education during the year and earn less than $80,000 annually if they file as single, $160,000 filing jointly. The credit can be used as a form of reimbursement for tuition, books, housing, and other school, vocational program or study-related needs. This tax credit can be worth up to $2,500, but it can only be used for four years of study.
The Adoption Credit
If you adopted a child this year, the Adoption Credit allows you to be eligible for up to $13,400 to cover the costs of an adoption attorney, adoption fees, travel, and court costs. These are just a few of the most commonly claimed credits. To learn more about claiming tax credits, check out our guide to understanding the difference between tax credits and tax deductions.
Strategy 2: Use Applicable Tax Deductions
Tax deductions are not as drastic as tax credits but they can still be a powerful force when it comes to reducing your tax liability. Deductions are counted as subtractions to your total taxable income. Unlike credits, they are not subtracted directly from the amount you owe, but instead, the amount of money you earned. For example, if you earned $50,000 in one year but $10,000 in tax deductions, you would only be responsible for paying tax on $40,000 of your income. The rules for income tax deductions are much looser than tax credits, especially if you are self-employed or you own and operate a business. Some of the most commonly used tax deductions include:
Student Loan Interest
If you are not classified as a dependent and you made a payment on your student loans, you can deduct the interest from your taxable income up to $2,500 from the Student Loan Interest Deduction. Your budgeted funds for those school payments can actually help you come Tax Day.
Charitable Contributions
The Charitable Contribution Deduction allows for donations made to qualified nonprofit associations can be deducted from your taxable income. If you made a non-monetary donation, you can deduct the reasonable value of the item instead. For example, if you donated a car or truck to a nonprofit, you may deduct the Kelley Blue Book value of the vehicle from your income.
The Costs of Doing Business as a Contractor or Business Owner
Self-employed individuals benefit the most from tax deductions. Business expenses, including office supplies, equipment and computers, employee wages, and even small gifts for clients and customers all qualify as deductions. If you frequently travel for work, be sure to record how many miles you drove, as you can also deduct $0.54 per mile for business purposes.
Classroom Supplies
If you are a teacher, professor, or another type of educator and you spent money on classroom materials, you may deduct up to $250 from your taxable income.
Strategy 3: Other Alternative Methods to Raise Your Tax Return
Add Money to Your Retirement Accounts
Contributions made to a 401(k) or a traditional IRA can be deducted from your taxable income. If you haven’t already maxed out your account for the year, you have until December 31 to make a deductible contribution.
Use Free Tax Software
While many tax software companies offer a range of products at varying price points, most offer a basic free edition that will help you file your federal taxes. If you do not make money through rental properties, you aren’t self-employed, and you don’t need to calculate brokerage taxes or other complicated investment taxes, opt for these free editions and you can save money.
Plan for Next Year Today
If you miss a few opportunities to save on your return this year, don’t worry — it’s never too early to start planning for next year. Carefully document your expenses, miles driven for business or medical purposes, capital gains taxes, the money you’ve earned through investments, and charitable contributions throughout the year to ensure that you claim every dollar you’re owed when tax time rolls around again.
Strategy 4: Use a Professional Service to Maximize Your Return
No one can possibly memorize every possible deduction, itemization, and tax write-off that applies. Many Americans turn to professional tax software to handle their taxes themselves, or they employ the assistance of a certified public accountant to maximize deductions. While tax professionals can be useful for any taxpayer, business owners, self-employed freelancers and contractors and those who earn a significant amount of money through investments and day trading will likely reap the biggest benefits.
Final Thoughts
The best way to maximize your tax return is to stay organized throughout the year. No matter if you take home a standard wage or you are self-employed, it’s best to document your money using a spreadsheet to narrow in on savings during tax time.
About Sarah Horvath
Sarah is an expert in the insurance, investing for retirement and cryptocurrency space.