Oh the dreaded “T” word – taxes. Every time January 1st rolls around you can practically hear a collective sigh go out around the world as most people begin preparing their taxes. Preparing your taxes might be a pain but getting that tax refund is like Christmas part 2.
But are you sure you are getting the most out of your tax returns? Are you aware of all the credits and deductions you could be taking? If you are wondering what you should do to get your biggest return ever, keep reading.
Here’s what you should do maximize your tax return:
- Choose the most beneficial filing status
- Don’t forget about your above-the-line deductions
- Optimize your itemized deductions
- Apply your tax credits
For those who are curious here are all the credits and deductions you can take:
Above The Line Deductions | Itemized Deductions | Credits |
|---|---|---|
Moving Expenses | Mortgage Interest | Child Tax Credit |
Educator Expenses | Mortgage Insurance | Foreign Tax Credit |
Student Loan Interest | Property Taxes | Net Premium Tax Credit |
Tuition and Fees | Charity Miles | Saver's Credit |
Certain Business Expenses | Charitable Contributions | Earned Income Tax Credit |
Self-Employment Deductions | State and Local Taxes | American Opportunity Tax Credit |
Alimony Payments | Casualty and Theft Loss | Lifelong Learning Credit |
IRA Contributions | Investment Interest | Residential Energy Credit |
HSA Contributions | Medical Miles | Adoption Credit |
Penalty of Early Withdrawals of Savings | Medical and Dental Expenses | Child and Dependent Care Tax Credit |
That’s a lot of good money that many people are probably leaving on the table simply because they are not aware of it.
While it is nice to know that you have so many options, sadly you may not be able to take all of these deductions and credits.
Let’s see what credits and deductions you qualify for as well as how to use the system to get your biggest return to date!
Choose Your Filing Status Wisely
There are five different statuses you can potentially use to file your taxes: single, head of household, married filing jointly, married filing separately, qualified widow/widower.
Here are the requirements for each:
Single: Unmarried, Divorced, Legally separated |
Head of Household: Unmarried, Have a dependent, Paid more than ½ of expenses |
Married Filing Jointly: Married by December 31st of the tax year |
Married Filing Separately: Married by December 31st of the tax year |
Qualifying Widow(er): Spouse died that year and you have a dependent child |
Many Americans file under single but if you can, use the Head of Household option as there are better tax brackets and more tax breaks.
You must be unmarried with at least one child or dependent and paying for more than ½ of the expenses to qualify.
The dependent could be your mother, father, or, in some cases, an extended family member. If this is the case, they do not have to live with you but you must show that you pay at least ½ of their expenses.
You can claim head of household if you are supporting an elderly parent even if they don’t live with you!
Filing jointly has some major benefits over filing separately: higher income thresholds for taxes and deductions and access to more credits such as the Earned Income Credit just to name a few.
However, there can be some instances where filing separately is better. If, for instance, one partner had huge medical bills, it would be more beneficial to file separately so you can have a bigger deduction on your taxes.
Also, if you suspect your partner might be defrauding the government in anyway filing separately can save you from a world of trouble later.
Qualifying Widow(er) status allows you the benefit of filing ‘Married Filing Jointy’ for two years after your spouse’s death.
Your Above the Line Deductions
These ‘adjustments to income’ or above-the-line deductions play an important part in your taxes as they determine your adjusted gross income, or AGI.
There are many above the line deductions that I’m not sure many people are aware of or take advantage of. Unfortunately, the Tax Cuts and Jobs Act of 2017 did away with and restricted many of these deductions.
Here’s a list of all the above-the-line deductions you can potentially take:
Optimize Your Deductions
With the passing of the Tax Cut and Jobs Act (TCJA) a few years ago (which almost doubled the amount of the standard deduction), it has been increasingly less likely for people to itemize.
The tax foundation estimated that under the new law only 13.7% of taxpayers would itemize in 2019. That is almost half of what it would have been before TCJA with a significant drop in the middle class wage earners itemizing.
It’s true that there is no point in itemizing if your deductions will not be greater than the standard deduction but there may be some deductions that you have been overlooking these past few years.
Note: If you are filing separately and your spouse itemizes, you have to itemize as well.
The thing is, you can reduce your taxable income substantially if you itemized. It may take more time to do but if you can and it makes financial sense, I say itemize.
Despite the fact that TCJA eliminated a lot of deductions, there are still some around that may prove useful in maximizing your return.
Here’s a quick list of the itemized deductions you could take:
*You have the option of not using their standard mileage rates and instead calculating your own costs. To do this though, you must keep a good record of time, dates, places, mileage, and tolls and parking costs.
There are other less used deductions such as gambling losses that can learned about in more detail in Instructions for Schedule A. Furthermore, check out this guide to itemized deductions for more information.
To itemize you must file Schedule A with your 1040.
Tip: Making extra mortgage and interest payments throughout the year can help you get a bigger interest deduction.
Apply Your Tax Credits
Credits are like the Holy Grail of taxes in that these bad boys actually reduce your tax bill dollar for dollar. Furthermore, if you mess around and qualify for refundable credits, these can reduce your bill past zero so that the IRS will end up owing you money.
Refundable tax credits not only reduce your tax bill but can give you money back.
For instance, if you owe $1000 in taxes but your total refundable credits come to $1500, then instead of you owing taxes the IRS owes you $500. This is why it is in your best interest to take as many tax credits as you qualify for.
Here’s a list of all the tax credits you can potentially take:
There are other credits out there such as the General Business Credit and credits for the Elderly and Disabled.
For more information on these and other tax credits check out this post. I break down which ones are refundable credit and which are not.
The forms you need to file vary depending on the credit you want to claim.
Related: The Complete Guide to Tax Credits
All in All
In order to maximize your tax returns you must know what deductions and credits are out there and which ones are available to you. There are so many options to choose from so take some time to really dive in and learn more about them.
Here is an article that looks in-depth at all deductions and credits.
Remember, little things such as which box to tick for filing status can have a huge impact on your returns. As they say, knowledge is power and I think that just by being aware of your options you can maximize your returns and have your best tax year yet!
*DISCLAIMER: The information provided in this post is the blogger's interpretation of IRS publications. The blogger is not a tax professional. Please consult with a certified tax professional for your specific situation and concerns when filing your taxes.