|Want to Earn Some Extra Money?
Want to get a big tax refund come tax filing season? Try these 4 tips to learn how to get a bigger tax refund in 2020.
As we move into a new decade, it’s important to establish good money habits that will improve your financial situation and help your money grow. Taxes, in particular, are an important aspect of financial literacy that should never be overlooked. Though tax season is something that’s hard to look forward to, there are ways you can maximize your return in order to ensure you are either getting a refund, or at least minimizing the amount of taxes you will have to pay. Failing to maximize your return and making mistakes can result in you paying more in taxes than you have to, or even underreporting your income and setting yourself up for interest and fees.
There is still plenty of time for you to make changes and adjustments before Tax Day so you can lower your taxes and make the most out of your earnings this past year. Practicing these healthy tax habits every year will ensure you are getting what you deserve and is going to lead you to a healthy, long-term relationship with your finances.
Determine if a Standard Deduction or Itemized Deduction Will Give You the Best Returns
Standard deductions are fixed dollar amounts that reduce the income you are taxed on. They vary depending on your filing status. For example, those filing as single receive a deduction of $12,200, whereas the head of household taxpayers get a standard deduction of $18,350. Approximately two out of all three returns use standard deductions because of its ease of use. They don’t require you to itemize deductions like medical expenses or donations and give you a deduction despite having no expenses that qualify for itemized deductions.
Itemized deductions, on the other hand, reduce your taxable income but are not a fixed dollar amount. They are tax deductions you receive for various expenses you incurred throughout the tax year. Some common itemized deductions include: charity donations, large, out-of-pocket medical or dental expenses, mortgage interest, and real estate taxes. If your itemized deductions exceed the standard deduction for your respective filing status, it might be worth putting in the extra work to maximize your tax return.
It’s important to stay up-to-date with the changing deduction laws in order to maximize your tax return. In the past few years alone, annual adjustments have changed, standard deduction rates have increased, personal exemption has gone away, certain credits have increased, and some tax deductions have been removed. If you want to make the most of your earnings and maximize your tax return, you will have to be aware of all the changes that will affect your return. Starting with making a decision between a standard deduction or itemized deduction and then seeing how the new laws will affect your return is a good place to start.
Contribute More Towards Retirement
One of the best and easiest ways to take advantage of your taxes now and also later when you retire is by utilizing retirement accounts like your 401(k) and IRA. In fact, according to FinanceWrite, the contribution limits for 401(k) plans have been raised for 2020, meaning you have the opportunity to protect more of your income from taxes. The 401(k) contribution limit for 2020 has been increased from $19,000 to $19,500. If you use this increase to your advantage, you can maximize your upcoming tax return even more. Paired with your employer’s match program, if offered, will be great for your long term financial plan.
Donate to Charity and Claim Available Deductions
Giving away and donating your old belongings will not only clear up your living spaces this new year, but is a great way to earn tax reductions and help out the less fortunate. Donating items, money, or volunteer hours to any charities recognized by the IRS is truly a win-win situation for everybody. If you volunteer at a charity, out-of-pocket expenses like the money you’ve spent on gas for the charity can be tax-deductible as well. As long as you are meticulous with your receipts and the money you spend on donations or charity, you will be able to accurately value and track your donations in exchange for deductions come tax season. Just make sure you are only claiming deductions for charities that are tax-exempt with the IRS.
Contribute Towards Your Kid’s College Fund
Starting a college plan like a 529 for your kids is a great way to give yourself tax benefits all the while saving for their educational expenses later down the road. Although contributions to 529’s are not tax-deductible, the investments you have within the plan collect tax-free. That means the investments can grow, taking advantage of tax free compounding, until they are taken out. Many states also offer deductions or credits for 529 contributions.
If your child is attending a private elementary school or high school, you can also open 529 plans to pay for tuition.
Opening 529 plans are practically as easy as opening up a savings account. Your local bank should be able to help you get one setup.
Review Your Flexible Spending Account
If you have an FSA plan with your employer, you are having pre-tax money taken out of your paycheck so you can use it for qualifying medical expenses that are not covered by your insurance. This is advantageous for you because those contributions reduce your taxable income while allowing you to save up money for medical expenses that aren’t covered by your insurance.
If you still have money left in your FSA, make sure you use it on doctor’s appointments you might have been putting off. Depending on your plan, you may lose a portion of the money that you have been saving.