Millions of Americans receive a tax refund each year. For some, this is inevitable because of their income levels. For others, it’s due to their withholding. There are ways to maximize a tax return. Some will lead to higher refunds, while others will lead to a lower tax bill.
Choose the Correct Filing Status
Some people will benefit from filing separately as a married couple. Others will benefit from filing a joint return. Those who have one spouse with substantial medical expenses might be able to pay less to the government by filing separately. Therefore, it can sometimes be worth the extra effort to calculate a tax bill using both filing options. Single filers without dependents will not have to worry about this step.
Take All Deductions
Deductions get subtracted from income. It might seem odd, but it’s a good idea to minimize income when it comes to paying taxes. A lower adjusted gross income means a lower tax bill. Charitable contributions can be deducted. Taxpayers can also deduct contributions to traditional IRA and 401(k) accounts. Mortgage interest is another frequent deduction. While these deductions will not cut a family’s tax bill on a dollar-for-dollar basis, they will provide tax savings at the marginal rate. For example, a taxpayer who saves $1,000 in an IRA while paying a 25% marginal tax rate would cut his or her tax bill by $250. Every dollar that does not go to the government is a dollar that can be used for any other purpose. Just keep in mind that the deductions must be greater than the standard deduction to result in a lower tax bill.
This is tied to the point related to deductions. There are relatively high contribution levels for current retirement accounts. Each taxpayer and a nonworking spouse can save up to $6,000 in an IRA as of 2019. Those who have access to an HSA can save up to $3,500 for an individual or $7,000 for a family and deduct the amount saved from their taxable income. Taxpayers can contribute to these accounts for the previous year through the required filing date of April 15. Those who have a little extra money available could make additional contributions through these accounts and cut their tax bill retroactively. Unfortunately, 401(k) contributions must be made by the end of the year.
Few people enjoy filing a tax return. While it’s not a fun exercise, it’s necessary. As long as taxpayers have to file a return, it’s a good idea to minimize the amount that they have to pay to the government. These steps can go a long way toward achieving tax savings.