No one enjoys doing their taxes, but there is a light at the end of the tunnel for most people: a tax refund. After you fill out all of your paperwork, the government will send you a check. Of course, in a perfect world, no one would get tax refunds because the government would withhold only as much as it needed to every year, so it wouldn't owe anybody, and you could have more money to spend each month. Still, who doesn't like getting a check in the mail?
You probably don't want to spend more time on your taxes than you have to, but it pays to understand some of the important factors that influence your tax bill, because they also affect the size of your refund. Here are three steps you can take right now to increase your tax refund.
1. Choose the right tax filing status
Your tax filing status determines what your standard deduction is, and it plays a part in deciding your tax bracket. Single adults without dependents may only claim the Single status. Unmarried people paying at least half the cost of supporting dependents may often file as Head of Household. This gives them a higher standard deduction and enables them to earn more income than Single filers before moving up to the next tax bracket.
Married couples can either file jointly or separately. Filing jointly makes sense for most couples, but those who think their partner may be hiding income may want to file separately so they aren't held responsible for any errors on their partner's tax return. Those hoping to claim a deduction for a large medical expense may also want to file separately. You may deduct medical expenses that are more than 10% of your adjusted gross income (AGI) for the year, but this is more difficult to do if you have to count your spouse's income as well. By filing separately, you can deduct any expenses that are more than 10% of your own AGI. Filing separately prohibits you from claiming certain tax credits and deductions, so think carefully before choosing this status.
An adult whose spouse has died recently and who is supporting children at home may claim qualifying widow(er) status for two years following the spouse's death. This status gives widow(er)s the higher standard deduction and more favorable tax brackets of married couples who file jointly, even though their spouse is now deceased. You can still file as married filing jointly in the year your spouse dies and then claim qualifying widow(er) status for the next two years.
2. Stash away money in your retirement accounts and your health savings account
If you have a little spare cash, consider putting it in an IRA or a health savings account (HSA) (if you're eligible for one) before you file your taxes. Contributions to traditional IRAs and HSAs reduce your taxable income for the year, so you owe income tax on less money. Depending on your income and tax filing status, these contributions could even move you into a lower tax bracket so you lose a smaller percentage of your income to the government.
Contributions to tax-deferred 401(k)s are also tax-deductible, but you cannot make any more contributions for the 2019 tax year now that it's 2020. You can write off 401(k) contributions you made in 2019, though. Roth 401(k) and Roth IRA contributions will not give you a tax break this year, so avoid these accounts if you want the tax break today. You pay taxes on your contributions to these accounts so that you don't owe taxes on your distributions in retirement.
You may contribute up to $6,000 to an IRA per year, or $7,000 if you're 50 or older. You can still make contributions for 2019 as long as you do so before the April 15, 2020, tax deadline and specify that you want the contribution applied to the 2019 tax year.
You must have a high-deductible health insurance plan in order to open an HSA. This is defined as one with a deductible of $1,400 or more for an individual or $2,800 or more for a family. But if you qualify, then you can still contribute up to $3,500 to an HSA for 2019 if you have self-only coverage, and those with family coverage may contribute up to $7,000. Just be sure to do so before the tax deadline and specify that the contribution is for 2019.
3. Claim all other tax deductions and credits you qualify for
Retirement accounts and HSA contributions aren't the only ways to save on your taxes. There are many more tax deductions and credits you can claim if you meet the criteria. Tax deductions reduce your taxable income for the year -- that is, the amount of money you owe income tax on -- while tax credits are a dollar-for-dollar reduction of your tax bill.
There are too many tax deductions and credits to list them all here, but some of the most popular are:
- Self-employment expenses, including home office deductions and business supplies
- Large medical expenses exceeding 10% of your adjusted gross income (AGI), which is your income minus certain tax deductions
- The Earned Income Tax Credit for low- and middle-income Americans
- The Saver's Tax Credit for low-income Americans saving for retirement
- The Child Tax Credit for parents caring for minor children
- Charitable contributions to qualifying tax-exempt organizations
- Mortgage points
- Student loan interest deduction
Criteria for these tax credits and deductions varies, and it can change from one year to the next, so you must check the criteria every year to make sure you still qualify. Your tax filing software or the accountant that's doing your taxes should ask you questions to determine which tax breaks you qualify for, but it still doesn't hurt to understand the tax credits and deductions and their qualifications for yourself.
If you have to do your taxes (and you probably do), you might as well make it count. Take the above steps to maximize your tax refund, and then put that money to good use to help you pay down debt, save for an important financial goal, or do something you love.