Most Americans prefer getting their return ready and filing as quick as possible. However, we should all take the time to learn more about how we can get the most out of our tax return. Make sure to take the following into consideration:
1. Use the right filing status
Single filing status: Unmarried, legally separated or divorced.
Married filing jointly: Married and you both agree to file a joint return.
Married filing separately: Married but each spouse is responsible for their own tax return. Use this method if it results in a greater tax refund or lower tax liability than filing jointly.
Head of household: 1) Unmarried; 2) you paid more than half the cost of keeping up a home for the year; and 3) a qualifying person lived with you in the home for more than half of the year.
Qualifying widow(er) with dependent child: You may use this status for two years following the death of your spouse and it entitles you to use joint return tax rates and the highest standard deduction amount (if filing using the standard deduction.)
2. Contribute to your retirement
You have until your filing deadline to make a contribution to your individual retirement account (IRA) and receive up to $7,000 in deductions (if you’re older than 50). There’s a $6,000 limit on taxable contributions to retirement plans and those aged 50 or over can contribute another $1,000. Contributing to your IRA could also help you qualify for a saver’s credit. The amount of the credit is 50%, 20% or 10% of your retirement plan or IRA or ABLE account contributions, depending on your adjusted gross income (AGI). The maximum contribution amount that may qualify for the credit is $2,000 ($4,000 if married filing jointly), making the maximum credit $1,000 ($2,000 if married filing jointly).
3. Claim your tax credit
Tax credits are a dollar-for-dollar reduction of the amount of income tax you owe. In other words, if you owe $800 in taxes but are eligible for a $600 tax credit, your liability would drop to just $200. Sounds great, right? Well, according to the IRS, 1 out of 5 taxpayers fail to claim their tax credit. So, whether your income just changed or you’re not sure if it’s enough to qualify for a tax credit, make sure you check before filing.
4. Claim your tax deductions
While the tax code has been simplified and provides taxpayers with standard deductions based on filing status it is always prudent to do your research and see if the deductions you can claim exceed the standard deduction.
The standard deduction is a flat-dollar, no questions asked deduction. The amount that you qualify for depends on your filing status; whether you are single, married (filing jointly), married (filing separately) or head of household.
For your 2019 tax return, the standard deductions are:
$12,400 for single filers and, if married, filing separately
$24,800 for married individuals filing jointly
$18,650 for head of household
On the other hand, the opportunity to itemize deductions allows you to reduce your taxable income by taking advantage of the hundreds of available tax deductions permitted by the IRS and for which you may qualify. These deductions are comprised of various types of expensesthat you have incurred throughout the year.
However, before we start, let’s make sure you know how to calculate your adjusted gross income (AGI). AGI = the total income you report that is subject to income tax minus specific deductions that you are eligible to take. Also, you can use this simple Adjusted Gross Income Calculator.
You need to keep this in mind because Itemized deductions are subtractions from a taxpayer’s AGI that reduce the amount of income that is taxed.
Here is a list of the expenses that you’re able to deduct from your AGI.
- Home Mortgage Interest
- State and Local Property Taxes
- Medical Expenses
- Investment Expenses
- Charitable Contributions
- Miscellaneous Deductions
Home Mortgage Interest
This is a common one for homeowners which allows them to deduct from taxable income the interest paid on a loan taken out to purchase, build, or improve their property. Taxpayers can deduct interest paid on first and second mortgages up to $750,000 in mortgage debt (the limit is $375,000 if filing Single). Any interest paid on first or second mortgages over this amount would not be tax deductible.
For example: Suppose you have a home equity line (HELOC) of $300,000 and a mortgage that is $400,000, the interest paid on both of those loans may be deductible since you didn’t exceed the $750,000 cap.
State and Local Property Taxes
If you own a home, you can deduct the real estate taxes that you pay on your property (state, or out of state), but only if paid during the fiscal year you’re filing. You might be able to deduct property and real estate taxes you pay on your:
- Primary home
- Co-op apartment
- Vacation homes
- Land
- Property outside the U.S.
- Cars, RV’s, other vehicles
- Aircraft and boats
You may deduct up to $10,000, or $5,000 if filing individually, and could be subject to limits on other itemized deductions. Please refer to the Instructions for Form 1040 and 1040-SR (PDF) and Topic No. 501 for additional information on these limitations.
For example: If you paid $25,000 in property taxes before December, 2019, you would only be able to deduct $10,000 from your 2019 taxable income. If paid during 2020, then you would deduct it from your 2020 taxable income, even if the property tax bill corresponded to 2019.
Medical Expenses
Taxpayers can deduct qualified unreimbursed medical care expenses in excess of 7.5% of their AGI. The IRS allows you to deduct preventive care, treatment, surgeries, dental, and vision expenses. You can also deduct the cost of physiological and psychiatric care, prescription medication, and articles like glasses, contact lenses, hearing aids, and more. If you travel for medical care, you can also deduct procedures, air fare, or car mileage.
So, for example, if your AGI is $55,000, anything beyond the first $4,125 of your medical bills could be deductible.
Investment Expenses
Investment Interest is interest paid on a loan where the proceeds were used to purchase property for investment. According to the Internal Revenue Service, “Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. It also includes property that produces gain or loss.”
Investment Income includes interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities and businesses that are passive activities to the taxpayer.
To calculate your Net Investment Income, subtract your investment expenses from your investment income. These deductions can include a variety of fees, accounting fees, legal fees, services, advice and other related costs.
If your investment expense is less than your Net Investment Income, the entire investment expense is deductible. Otherwise, you can deduct expenses up to the Net Investment Income amount and the rest can be carried forward to future years.
Charitable Contributions
You can deduct charitable contributions made to qualified organizations.
If you donated non-cash items, these are also deductible. The value of cars, houses, toys, food, among others can be deducted. Be sure to get a written, signed acknowledgement of your donation and its best to take pictures as well to keep everything documented.
There are, however, non-deductible donations like gifts to individuals, gifts to political parties or campaigns, contributions to labor unions, chambers of commerce or business associations, and contributions to foreign countries or to for-profit schools and hospitals.
Prior to 2019, the limit for cash donations was 50% of your adjusted gross income, but it is now 60% until 2025. If you exceed your threshold, you can carry over the excess to the following 5 years.
Self-Employment Deductions
If you work from home and set aside a dedicated area strictly to carry out your business activities, there is an opportunity to claim these deductions. You should, however, meticulously keep records that would satisfy an IRS probe or audit. Examples of deductions are office supplies, and phone and internet service expenses, among others.
At the end of the day, it’s your hard work and hours that you will get back. Let’s give our tax return the time and consideration it deserves.
If you’re in doubt regarding which type of deduction to pursue; it’s simple, if your standard deduction is less than your itemized deductions, then you should opt for the latter.
Filing your taxes can be a complicated process, but it’s worth taking the time to do it right. So, make sure you use these simple tips to maximize your tax refund and you’ll have plenty of money left in your pocket to spend elsewhere. Having a plan will give you the best return in life. Happy tax season!
