Top 6 Ways to Increase Your Tax Refund Now
Wednesday, October 20, 2010
For many Americans, an income tax refund is a windfall — a chunk of money that can be used for many different purposes. But the amount of this refund is determined by the numbers that are generated from the previous year. Therefore, the fourth quarter of the year is the time to start thinking about what can be done to maximize the amount that you can get back when you file your return in the spring. Here are some of the more common strategies that you can implement as the year ends:
Filers who are on the edge of being able to itemize their deductions for the year should consider making a donation of either cash or property to a qualified charity before the year is out. This can be especially beneficial if the filer has a piece of property of some value that he or she wishes to dispose of, such as an extra car or recreational vehicle. These can provide a substantial deduction that can increase your refund by hundreds (or even thousands) of dollars.
Retirement Plan Contributions
Those who need to reduce their taxable income for the year should make the maximum allowable contributions to their traditional, deductible retirement plans. In some cases, such as small business owners and those who make the maximum allowable lump-sum contribution to their plans for the year, this deduction can be fairly large.
Although contributing to Roth accounts may be the best way to go for some, traditional plan contributions afford a current deduction that can make a huge difference in the amount of declarable income for many filers. Even low-income taxpayers can claim the retirement savers’ credit for small contributions to their IRAs or employer-sponsored qualified plans.
Parents who pay tuition for their kids’ higher education are usually eligible for education tax credits of some sort. Those who must deplete their savings for this reason should take care to record the amounts paid for their tax records. The credits for these expenses can reduce a parent’s tax bill by thousands of dollars, depending upon the circumstances.
As rudimentary as this may sound, good record keeping is essential to maximizing your tax deductions. Make sure that you record every charitable contribution, every above-the-line deduction and anything else that can increase your income tax refund for the year. Keep copies of all receipts and other documentation that proves your transactions, as the IRS now requires this in order to accept these deductions on every return. Those who fail to do so invite a negative adjustment to their tax returns if they should become subject to an audit.
Many taxpayers may be surprised when they discover that certain kinds of expenses or losses can be deducted on their tax returns. Gambling losses are deductible, though only on par with winnings, and investment expenses (such as IRA custodial fees and margin interest) are only deductible if they exceed a certain percentage of your adjusted gross income (AGI).
This could be a good time to cut your losses in the market, if you are a short-term investor. Swap out losing stocks or bonds for similar holdings that offer potential gains and realize the losses on your return. These can provide a maximum reduction of $3,000 of your reportable income, or reduce your reported income by more, if you have large reportable gains that you can write your losses against this year. And reduced income can translate into a larger refund, in most cases.
The Bottom Line
These are just some of the ways that taxpayers can increase their tax refunds. But remember that your refund is just that; it’s the return of excess money that you have withheld from your paycheck throughout the year.