How To Increase Your Tax Refund
As we find ourselves in the final stretch of the year, it's a pivotal moment to consider some strategic steps that can both reduce your tax bill and increase your tax refund when you file. By taking action now, you can ensure that you're making the most of your financial situation before the year concludes.
1. Defer Bonuses
If you anticipate a year-end bonus due to your hard work, it's essential to be mindful of the potential tax implications. A substantial bonus might push you into a higher tax bracket, increasing the taxes you owe. To mitigate this, consider delaying the receipt of your bonus until the beginning of the next year. This way, you'll still receive your well-deserved bonus close to year-end without the immediate tax burden.
2. Accelerate Deductions & Defer Income
Some tax deductions are recognized in the year in which you make the corresponding payments. For instance, if you're a homeowner, you can deduct the mortgage interest you pay. By making an additional mortgage payment on December 31, you can claim this extra interest paid as a deduction in the current tax year. This enables you to take the deduction sooner, rather than waiting another 12 months for the next tax filing. However, be aware of specific provisions, especially if you purchased your home after December 15, 2017, as the rules for deducting mortgage interest may differ.
3. Donate to Charity
With the holiday season approaching, it's a perfect time to declutter and contribute to those in need. Donating non-cash and monetary gifts to a qualified charitable organization can result in a tax deduction, provided you itemize your deductions. If you volunteer for such an organization, remember that you can also deduct your mileage (14 cents per mile) driven for charitable service. To maximize these deductions, make your contributions by December 31, even if you pay them via credit card, as you don't need to settle the bill until the new year to claim the tax benefit.
4. Take a Class
Furthering your education or skills can be a smart way to reduce your taxes and boost your refund. Paying for the next quarter's tuition by December 31 can qualify you for the Lifetime Learning Credit, potentially yielding a tax credit of up to $2,000 per tax return.
5. Maximize Your Retirement
Contributing to your retirement savings account, whether it's a 401(k) or a Traditional IRA, not only secures your financial future but also reduces your taxable income. Self-employed individuals can consider contributing to a SEP IRA, allowing contributions up to the lesser of 25% of net self-employment income or $61,000 for 2022 (or $67,500 if aged 50 and older). You can make a 2022 SEP IRA contribution up to the extended tax deadline, potentially leading to a deduction for your contribution.
6. Spend Your FSA
If you have funds remaining in your Flexible Spending Account (FSA), consider using them for overdue medical visits. While the previous "use it or lose it" rule may not strictly apply, you might be able to carry over only a limited amount of unused funds, potentially around $570, into the next year. Your plan may also have a time limit for using funds, usually up to 2 1/2 months after the plan year ends.
7. Buy Low, Sell Low
If your investment portfolio contains assets that have decreased in value, you can leverage these losses to offset gains from other investments. This involves selling the underperforming investments to balance out your overall investment gains. If your losses surpass your gains, you can apply up to $3,000 of that loss against your regular income, with any remaining losses carrying forward to the next tax year.
8. Make W-4 Withholding Allowance Adjustments
Life changes, such as getting married, having a child, or experiencing fluctuations in income, can significantly impact your tax outcome. It's advisable to adjust the amount of taxes withheld from your paycheck by revising your W-4 form. By doing this, you can align your withholding with your current financial situation, whether you prefer a larger tax refund or more take-home pay.
9. Be Aware of the Other Dependent Credit (ODC)
If you provide financial support to non-child dependents like parents or grandparents, you can benefit from the "Other Dependent Credit." This credit, worth up to $500, can directly reduce the taxes you owe by the same amount.
10. Go Green and Save Money on Your Taxes
Exploring energy-efficient credits and electric vehicle incentives can be an environmentally conscious way to both lower your energy bills and reduce your tax liability. These credits offer a dollar-for-dollar reduction of your taxes, allowing you to save money while contributing to a greener planet. Before the year concludes, make sure to take advantage of these tax-saving opportunities.
Don’t worry about knowing these tax rules. You can come to Butler Squared Consulting and fully hand over your taxes to an expert who can do your taxes from start to finish all from the comfort of your home. Butler Squared Consulting tax experts are available year around.