It's that time of year. As a working American, you should have received your W-2 from your employer by now and are ready to file your income tax return. Maybe you are anticipating a refund and are looking forward to that extra money. But hold the phone! Before you fill out your income tax refund or have someone else do it, the Rules of Thumb blog from MoneyThumb wants you to know that there may be ways to increase your refund that you don't know about. Ask yourself the following questions we formulated with the help of an article from Turbo Tax before you fill out your income tax return to maximize your refund:
Are You Taking Advantage of All Available Deductions?
Many deductions exist that you may not be aware of, and several of them are pretty commonly overlooked. The deductions you qualify for can make a significant difference in your tax refund. They include:
- State sales tax – Using the IRS's calculator, you can determine how much of your state and local sales taxes you can deduct.
- Reinvested dividends – This one technically isn't a deduction, but it can reduce your overall tax liability. When you automatically have dividends from mutual funds reinvested, include that in your cost basis. This way, when you sell shares, you might reduce your taxable capital gain.
- Out-of-pocket charitable contributions – Big donations aren't the only way to get a write-off. Keep track of the qualified small expenses too, like ingredients for the yummy cake that you donated to the bake sale. You might find yourself surprised by how quickly a few charitable expenditures here and there can add up.
- Student loan interest – Even if you didn't pay this yourself, you can take the deduction for it as long as you are the one who is obligated to pay. Under new guidelines, if someone else pays the loan, the IRS views it as if you were given the money and used it to pay the student loan. If you meet all of the requirements then you would be eligible for the deduction.
- Child and dependent care – Up to $6,000 of qualifying expenses can be used for the Child and Dependent Care Tax Credit.
- Earned Income Tax Credit, or EITC – This credit helps families with low and moderate-income levels. It's meant to benefit working families with children. If you have three or more qualifying kids, the credit could be worth up to $6,557 for you for the tax year 2019 — and could net you a refund even if you don’t have any tax.
- State income tax paid on last year’s return – If you paid money on your state income tax return last year, you can add that to any other state income tax, up to $10,000, and use it as an itemized deduction.
- Certain jury duty fees – If your company paid you while on jury duty and your employer required you to hand over your jury duty pay from the court; you can claim the amount that you handed over as an adjustment to your income.
- Medical miles - Subject to an overall AGI threshold for total medical expenses and worth 20 cents per mile in 2019. For 2019, the threshold is any qualifying unreimbursed medical expenses that exceed 10% of your AGI.
- Charity miles - Fully deductible at 14 cents per mile in 2019. So, if you drove 50 miles per week to volunteer for a charity in 2019, that’s an additional $364 deduction:
- 52 weeks/year x 50 miles/week = 2,600 miles you drove in a year
- 2,600 miles x $0.14/mile = $364
It’s important to keep good records for your deductions especially when you don’t receive some type of receipt as with some charitable contributions and charitable or medical miles. Nothing fancy is required — even a spiral notebook in your glove compartment is fine. Make sure to keep track of:
- The date, miles and medical or charitable purpose of each trip
- The market value of any in-kind donations, such as clothing and household goods
- The dollars you spend in order to do charity work — for example when you bake for a fundraiser the cost of your ingredients is deductible, but the value of the time you spent baking isn't.
Have You Maximized Your IRA and/or HSA Contributions?
You have until the April 15 filing deadline (unless it's delayed due to a weekend or holiday) to open or contribute to a traditional IRA for the previous tax year. That means you can make a contribution that counts for your 2019 return by April 15, 2020. That gives you the flexibility of claiming the credit on your return, filing early and using your refund to open the account.
- Traditional IRA contributions can reduce your taxable income. You can take advantage of the maximum contribution and, if you're at least 50 years old, the catch-up provision can add to your IRA.
- Although contributions to a Roth IRA don't give you a deduction, they still qualify for the valuable Saver's Credit if you meet income guidelines.
- If you're self-employed, you have until October 15, 2020, to contribute to certain self-employed retirement plans, provided that you file an extension. If you don't file for an extension, April 15 is the deadline for most contributions.
Pre-tax contributions to a Health Savings Account (HSA) can also reduce your taxable income. You can make these up until the normal April filing deadline as well. Certain requirements must be met in order to open and contribute to an HSA:
- You must be enrolled in a health insurance plan that has high deductibles that meet or exceed the IRS’s required amounts.
- That plan must also impose the maximum annual out-of-pocket cost ceilings that meet the IRS’s limitations.
You won’t be able to participate in an HSA if any of the following are true:
- You have other “first-dollar” medical coverage
- You enroll in Medicare
- You are claimed as a dependent on another taxpayer’s return
Are You Tax Credit Savvy?
Tax credits usually work better than deductions as refund boosters because they're a dollar-for-dollar reduction of your taxes. If you get a $100 credit, you get $100 off your taxes. Many Americans leave money on the table when it comes to claiming tax credits.
- Did you know that 20% of eligible Americans don't claim the Earned Income Tax Credit? If you meet the guidelines, you may be eligible for the EITC, even if you're single with no children.
- If you have no qualifying children, the maximum credit amount is $529 for 2019.
- If you have three or more qualifying children for the maximum credit jumps to $6,557.
- If you have kids, it also pays to claim the Child and Dependent Care Credit.
If you're a college student or supporting a child in college, you may be eligible to claim valuable education credits.
- The American Opportunity Credit is refundable up to $1,000. This means you could receive as much as $1,000, even if you don't have a tax bill. The total credit is $2,500 and applies only to funds paid towards the first four years of qualified undergraduate higher education expenses.
- If you're in graduate school or beyond, you may be eligible for the Lifetime Learning Credit. For 2019, you can claim 20% of your qualified costs up to $10,000, or a maximum of $2,000, depending on your income.
Tax credits for energy-saving home improvements can also keep more money in your wallet throughout the year and at tax time.
- The credit for 2019 is up to 30% of the cost of certain qualified energy expenditures. After 2019, reduced percentages apply for 2020 and 2021. That means if you installed solar panels at a cost of $20,000, your total credit is $6,000 in 2019.
- Any portion unused in 2019 carries over to 2020.
- That carryover doesn’t apply to the credit for electric vehicles, but the IRS is still offering up to $7,500 per qualifying vehicle for 2019, subject to manufacturer sales limits. The credit begins to phase out once each manufacturer has sold more than 200,000 qualifying vehicles.
By answering the above questions and taking advantage of any extra credits or deductions we have mentioned you may very well increase your income tax refund in a big way. The team at MoneyThumb would love it if you shared this post on your social media pages so that your friends and family can have a chance to increase their income tax refunds as well.