Sunday, January 23, 2011

Top 10 Tips for Getting the Biggest Tax Refund

Tax refunds can feel like Christmas in springtime. With a sudden boost to your bank account, you can look forward to going on a shopping spree, catching up on debt or squirreling the refund away in savings. These days, you can even anticipate when your windfall will arrive by tracking the status of your refund with the Refund Status tool available from the IRS online.

For those receiving minimal refunds, the celebration can be less like real bubbly and more like club soda. But forget the pity party: These taxpayers may be receiving small refunds because they're precise in how they prepare for their tax obligation, achieving the goal toward a break-even outcome.

While you can't control the fact that you have to pay taxes, you can control how big of a refund is in your future. Some of the following suggestions still apply for 2010, while you can use others in years to come. So how can you get the biggest tax refund?

 

10: Increase Withholding

If you're employed full time for a company, one of the first things you did when you were hired was fill out IRS tax form W-4. The information you provide on the W-4 determines how much money is withheld from your paycheck each pay period and paid toward your personal income taxes. The calculation is based on the number of exemptions you claim. The more exemptions you claim, the less money is withheld for tax purposes.

If your goal is to increase the dollar amount you receive in your tax refund, you can go to the human resources department and request to change your W-4 tax form. When you reduce the number of exemptions on that form, then a larger amount of money will be withheld from your check each payday. Your tax refund will therefore be larger. The times of year you're allowed make this change are dependent on your company's policies, but generally, it may be made any time of year.

9: Deduct All Donations

Deductions for charitable donations can offer substantial tax savings, thereby making a large and profitable difference in your refund. All types of donations are eligible as tax deductions to help lower your tax bill.

There are some restrictions, though. One is that the donations must be made to a nonprofit that can prove 501(c)(3) tax status. Most legitimate charities state clearly on their Web sites or in their literature that they're 501(c)(3) nonprofits, so it's usually simple to verify.

Another requirement is that you must keep a receipt. Again, legitimate nonprofits have systems in place to ensure that they'll give you receipts for any and all donations. Yet another restriction is that not all expenditures that go toward nonprofits are deductible. In addition, there may be a ceiling as to how much of your donations you may deduct -- it might be best to see a professional accountant to be sure you don't exceed the maximum.

Below are some common expenses that are deductible:

  • Property. You can deduct donated real estate, furniture, clothing, automobiles, electronic equipment and office supplies.
  • Mileage. If you use your car to assist a nonprofit, you may deduct the portion of mileage that was used.
  • Cash. Cash donations are deductible.
  • Tithes. You may deduct tithes to churches and certain other types of religious organizations.

8: Professional Expenses

Some jobs require employees to have or use equipment that the employees purchase out of their own pockets. If the company doesn't reimburse for those expenses, some may be deducted on income taxes to help maximize a tax refund.

For example, the subscription costs of professional publications that keep you updated about how to perform your job better can be deducted. The same is true of professional dues, such as those you pay to belong to unions or professional organizations.

In addition, if you use a personal mobile phone for work, then the portion used for work may be deducted. For professional expenses, be sure to consult a professional tax accountant. Some expenses, such as uniforms and travel, may not be deductible.

 

7: Review Your Filing Status

Filing status, such as single, head of household, married filing separately or jointly, and others, can greatly influence the amount of money you receive in your refund. Filing status may change if you divorce or lose a spouse to death, for example, and this may make you eligible for a larger refund.

In general, married couples may expect a larger tax refund if they file jointly. Filing a joint return tends to lower the overall tax bill and can offer some tax breaks unavailable to those filing separately. There are some reasons, however, that a couple may want to file separately, according to Sandra Block, who writes a column for USA Today. Block suggests that a couple should consider filing separately if they have a large amount of unreimbursed medical expenses, more than average amount of miscellaneous deductions or if one spouse is behind on child support or student loan debts.

Block also suggests that if your spouse takes risks that are out of your comfort zone and have the potential for legal ramifications, you may want to file separately so that your nose -- or tax return -- stays clean.

 

6: Don't Forget Familial Obligations

Taking care of kids (and these days, aging parents) can rack up huge expenses. Did you know many of those expenses are deductible? Fortunately, you can deduct dependent care, or the costs associated with taking care of your dependent children and parents.

Another family expense that you can deduct is alimony. While child support isn't deductible, alimony is.

Healthcare expenses for the family can be deductible, too. You'll want to consult a tax professional to find out what types (and what percentage) of healthcare expenses can shave down your tax bill and positively affect your total refund.

 

5: Increase IRA Contributions

One of the most highly recommended ways to increase your tax refund is to increase your contributions to your retirement fund. Contributing to an Individual Retirement Account (IRA) not only facilitates saving for retirement, but placing money into the IRA lowers the total taxable income because it comes off the top. The more you contribute to the IRA, the less of your income is subject to taxes. Generally, the lower your taxable income, the less you'll owe in taxes, and the less you owe in taxes, the greater the refund.

Be careful, though, to make the IRA contribution by the deadline, and know your limits. There's a maximum amount that can be applied for lowering taxable income. Consult a tax professional to ensure your IRA contributions are made on time and in the right dollar amount.

 

4: Refinance Your Home

When interest rates are low, many homeowners look at refinancing their homes. Those who refinance at a lower interest rate benefit from lower mortgage payments as well as a lower amount paid over the life of the mortgage. But did you know refinancing could also bump up your tax return?

With most home loans -- let's use a fixed loan as an example -- the homeowner will pay the mortgage holder (often a bank) a fixed amount each month for the 15 or 30 years of the loan. This payment is divided between money that's applied toward the principal balance (the actual amount of the loan) and money applied toward the interest the institution charges to lend the money.

In the first years, most of the monthly payment is applied toward the interest, with a far smaller amount applied toward the principal. Each month, the equation tips just a little bit the other way. By the end of the mortgage, the homeowner is paying far more toward the principal than toward the interest.

When you refinance your home, this equation resets, and the majority of your monthly payment will again be going toward interest. The principal isn't deductible, but the interest is, so you'll have a larger tax deduction from the higher interest payments.

 

3: Use Current Tax Laws

Changes in tax laws can bring tax deductions, if you know where to look. A recent law includes new homebuyer credits that basically put thousands of dollars in some home purchasers' pockets. If you remodel your home and incorporate energy-saving improvements, you can receive credit for this eco-friendly act. You may also gain financial favor from the IRS if you purchase certain hybrid vehicles.

To take advantage of current tax laws, you might try one of two things. First, you can hire a tax accountant. It's the accountant's job to keep an eye on changing tax laws and how they affect your tax return.

Second, you can use a computer software program such as TurboTax. One of the features such software offers is a yearly update with new tax deductions and credit opportunities that have been affected by changes in laws. The software also has checks and balances built in to ensure you're taking advantage of available opportunities.

 

2: Start a Home Business

"For many, business ownership has become a path to financial freedom," according to the Alabama-based Ask Tax Guys. They point out that home-based business owners can deduct things like a home office, telephone, Internet service and office supplies. "When you start a business, the initial deductions may offer tax refunds, and as the business begins to make money, the continuing deductions provide financial freedom." Tax accountant Sandy Botkin says that having a home-based business can bring you around $3,000 to $9,000 in tax savings [source: Ask Tax Guys].

If you've ever thought about starting a business in the hours around your regular job, or you're a stay-at-home-parent with a great idea, starting a home-based business can make a lot of fiscal sense. The equipment you use for your business, and portions of the facilities and utilities, may be deductible. And you'll (hopefully) be making money, too!

 

1: Invest in Tax Planning

Tax planning is one of the best ways to take advantage of all these deductions and get the maximum tax refund possible. Tax planning often starts at the very beginning of the year and takes into account how much money you'll earn and how different expenses (or extra income) affect the total tax amount that you'll owe. Planning also helps you evaluate different ways of using your money to buy needed, deductible items or make other tax-reducing investments. A tax-planning professional (or you, if you're your own best accountant) can play with the numbers in computer software to evaluate what changes you can make to lower the tax bill, therefore upping the refund.

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