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5 Ways to Boost Your Tax Refund

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Here are five effective strategies to minimize your tax bill come tax time, ensuring you don't pay more than necessary and potentially even increasing your tax refund.
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Key Points:

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• Opting for the Married Filing Separately status can lead to tax savings, especially if one spouse has significant deductible medical expenses. Additionally, this filing status might enable one spouse to claim a larger Child Tax Credit.

• Choosing to file as Head of Household can result in a higher Standard Deduction and more advantageous tax brackets compared to filing as Single, provided you meet the eligibility criteria.

• Certain deductions are frequently overlooked, such as those for state and local sales taxes, state income taxes, out-of-pocket charitable contributions (including mileage), and interest on student loans.

• Families with modest to moderate incomes may be eligible for the Earned Income Tax Credit, which can amount to as much as $7,430 (for tax year 2023) and is disbursed as a refund if no tax is owed.

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Boosting Your Tax Refund

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During tax season, individuals often seek methods to minimize their tax burden and potentially increase their tax refunds, despite varying opinions on government spending. These tactics provide alternative approaches to ensure that taxpayers pay only what they owe or even enhance their refunds.

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1. Rethink Your Filing Status

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The initial choice you make when filling out your tax return, namely selecting a filing status, can significantly impact the amount of your refund, particularly for married individuals. Despite the fact that roughly 96% of married couples choose to file jointly annually, this option may not always be the most advantageous.

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• Opting for Married Filing Separately status may necessitate additional effort, yet the investment of time can potentially result in tax savings, given specific circumstances. For instance, if one spouse incurs substantial medical expenses, such as COBRA payments following a job loss, calculating taxes separately could enable a greater deduction.
  
  

• Separately filing spouses are eligible for the Child Tax Credit. In 2020, this credit amounted to $2,000 per child under the age of 17, and now, it can be claimed by individual filers with adjusted gross incomes below $200,000 (compared to $400,000 for joint filers).

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In the tax year 2021, the Child Tax Credit has been enhanced under the American Rescue Plan, increasing the per-child credit to either $3,600 or $3,000 based on the child's age, and now covers 17-year-olds as well. Notably, for 2021, the credit is fully refundable. To expedite assistance to families, the IRS will commence distributing advance payments of the 2021 Child Tax Credit starting in July 2021.

Opting for separate tax returns may come with disadvantages, including the potential loss of specific deductions and credits accessible to joint filers. It's crucial to carefully consider these factors to optimize your refund potential. Additionally, both spouses must choose either the standard deduction or itemize their deductions, without the option to mix-and-match between the two returns.

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• Performing tax calculations using both methods can guide you towards the filing status yielding the higher refund.

• VIncere Tax offers this calculation service and provides recommendations on the most suitable filing status.

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Unmarried taxpayers who have a qualifying dependent may find it beneficial to file as Head of Household, potentially reducing their tax obligations if they meet certain criteria.

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• This filing status offers a higher standard deduction and more favorable tax brackets compared to filing as Single. A qualifying dependent could include a child you have provided financial support to and who has resided with you for over six months, or an elderly parent whom you support financially.

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• Many individuals caring for elderly parents may overlook their eligibility for Head of Household status. If you contribute more than half of your parent's financial support, regardless of whether they live with you, you likely qualify for Head of Household filing status.

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2. Take Advantage of Tax Deductions

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Numerous deductions are available, some of which you might not even realize qualify for. Overlooking these deductions could result in missing out on potential tax savings. Deductions can significantly impact the amount of your tax refund.

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Examples of commonly overlooked deductions include:

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• State sales tax – By utilizing the IRS's calculator, you can ascertain the amount of state and local sales taxes eligible for deduction.

• Reinvested dividends – While technically not a deduction, reinvested dividends can lower your overall tax liability. Include these in your cost basis to potentially reduce taxable capital gains upon selling shares.

• Out-of-pocket charitable contributions – It's not just large donations that count; even small charitable expenses like ingredients for donated items can add up and qualify for write-offs.

• Student loan interest – Even if someone else pays your student loan interest, you can still claim the deduction if you're obligated to repay the loan. The IRS treats it as if you received the money and used it for the loan payment, making you eligible for the deduction if all requirements are met.

• Child and dependent care – For tax year 2023, qualifying expenses up to $6,000 can be utilized for the Child and Dependent Care Credit.

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For 2021 only:

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In 2021, the American Rescue Plan introduces substantial modifications to the Child and Dependent Care Credit, affecting both the eligible expenses and the credit's availability based on income levels. Notably, the plan makes the credit fully refundable for the tax year 2021, allowing individuals to receive it even if they have no tax liability.

For the tax year 2021, the following changes apply to the Child and Dependent Care Credit:

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• The maximum qualifying expenses are $8,000 for one eligible individual and $16,000 for two or more qualifying individuals.

• 50% of the qualifying expenses are eligible for the credit.

• The credit begins to phase out for individuals with adjusted gross incomes (AGI) exceeding $125,000.

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Additionally, the maximum contribution limit for dependent care flexible spending accounts and tax-free employer-provided dependent care benefits is increased from $5,000 to $10,500 for tax year 2021.

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Earned Income Credit (EIC)

This credit is designed to assist families with low to moderate income levels, particularly those with children. For tax year 2023, families with three or more qualifying children could be eligible for a credit of up to $7,430, potentially resulting in a refund even if no tax is owed.

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State income tax paid on last year’s return

Taxpayers can include the amount paid on their state income tax return from the previous year, in addition to other state and local taxes, for a total deduction of up to $10,000 when itemizing deductions.

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Certain jury duty fees

If your employer required you to surrender your jury duty pay to the court while continuing to pay your salary, you can claim the amount handed over as an adjustment to your income.

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Medical miles

Subject to an adjusted gross income (AGI) threshold for total medical expenses, each mile driven for medical purposes in 2023 is deductible at a rate of 22 cents per mile. To qualify, unreimbursed medical expenses must exceed 7.5% of your AGI.

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Charity miles

Fully deductible at a rate of 14 cents per mile in 2023, individuals can claim miles driven for volunteer work for a charitable organization as a deduction. For instance, driving 50 miles per week to volunteer for a charity would result in an additional deduction of $364 for the year.

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Maintaining thorough records for your deductions is crucial, particularly for instances where receipts might not be provided, such as certain charitable contributions or miles driven for charitable or medical purposes. You don't need anything elaborate - a simple spiral notebook kept in your glove compartment suffices. Ensure to record:

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• The date, purpose, and number of miles for each trip made for medical or charitable reasons.
• The market value of any non-cash donations, like clothing or household items.
• Expenses incurred specifically for charity work, such as the cost of ingredients when baking for a fundraiser. However, remember that the value of your time spent baking is not deductible.

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Tax Tip: Making contributions to a Traditional IRA can lower your taxable income. You have until the tax filing deadline, unless it's extended due to a weekend or holiday, to open or contribute to a Traditional IRA for the preceding tax year.

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3. Optimize your IRA and HSA Contributions

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You can open or contribute to a traditional IRA for the prior tax year until the filing deadline, unless it's extended due to a weekend or holiday. This allows you the flexibility to claim the credit on your return, file early, and utilize your refund to establish the account.

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Contributions made to a Traditional IRA can effectively lower your taxable income. Taking full advantage of the maximum contribution is beneficial, and individuals aged 50 and above can further enhance their IRA savings through the catch-up provision.

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While contributions to a Roth IRA don't result in a deduction, they remain eligible for the valuable Saver's Credit, provided you meet the income eligibility criteria.

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For self-employed individuals, the deadline to contribute to certain self-employed retirement plans is extended until October 15, provided you file for an extension. If no extension is filed, the regular filing deadline for the year typically serves as the deadline for most contributions.

Contributions made to a Health Savings Account (HSA) before taxes can likewise reduce your taxable income, and these contributions can be made up until the filing deadline. However, certain criteria must be met to establish and contribute to an HSA:

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• You must be enrolled in a high-deductible health insurance plan that meets or exceeds the IRS's specified thresholds.

• The health insurance plan must also impose maximum annual out-of-pocket cost limits that align with the IRS's guidelines.

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You are ineligible to participate in an HSA if any of the following conditions apply:

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1. You have other forms of "first-dollar" medical coverage.
2. You enroll in Medicare.
3. You are claimed as a dependent on another taxpayer's return.

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4. Keep in mind that timing can enhance your tax refund

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Being mindful of the calendar can increase the likelihood of receiving a larger tax refund. Seek out opportunities to make payments or contributions before the end of the year that can effectively lower your taxable income. For instance:

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Taxpayers who are mindful of the calendar can increase their chances of receiving a larger tax refund by taking advantage of strategic timing. Consider making payments or contributions before the year's end that can effectively reduce your taxable income. Here are some examples:

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• Make your January mortgage payment before December 31 to include the added interest in your mortgage interest deduction.

• Schedule health-related treatments and exams in the last quarter of the year to maximize your potential medical expense deduction.

• Consider making charitable contributions, ensuring they are to qualified charities, and keep meticulous records of your expenditures.

• For self-employed individuals, assess purchases that qualify for deductions. Purchase office equipment and software before year-end to boost your refund.

• If eligible for the home office deduction, you can even deduct the cost of painting your home office, providing a fresh new look to your workspace for the new year.

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5. Harness the Power of Tax Credits

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Tax credits often yield greater benefits than deductions in enhancing your tax refund since they directly reduce your tax bill by a dollar-for-dollar amount. For instance, if you receive a $100 credit, you effectively reduce your taxes by $100. However, many taxpayers overlook claiming available tax credits, potentially leaving valuable money unclaimed.

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• Did you know that 20% of eligible Americans fail to claim the Earned Income Credit (EITC)? Even individuals without children may qualify for the EITC if they meet the eligibility criteria.

• For tax year 2023, the maximum credit amount is $600 for taxpayers without qualifying children. However, if you have three or more qualifying children, the maximum credit amount increases significantly to $7,430.

• Claiming the Child and Dependent Care Credit can also be advantageous for taxpayers with children.

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The Consolidated Appropriations Act (CAA), enacted on December 27, 2020, as part of pandemic relief efforts, offers provisions for tax year 2020. Taxpayers can utilize their 2019 earned income if it exceeds their 2020 earned income when calculating the Additional Child Tax Credit (ACTC) and the Earned Income Tax Credit (EITC). For tax year 2021, taxpayers have the option to use either their 2021 or 2019 income to maximize the credit.

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If you're either a college student or providing support for a child in college, you might qualify for valuable education credits.

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• The American Opportunity Credit is worth up to $2,500 per student for the first four years of qualified undergraduate higher education expenses. It's refundable up to $1,000, meaning you could receive this amount even if you don't owe taxes.

• For those in graduate school or beyond, the Lifetime Learning Credit allows you to claim 20% of your qualified costs up to $10,000, or a maximum of $2,000 per tax return, depending on your income.

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Additionally, tax credits for energy-saving home improvements can save you money both throughout the year and at tax time.

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• In 2023, you could receive a credit of up to 30% of the cost of certain qualified energy expenditures. For example, if you spent $20,000 on installing solar panels, you could receive a total credit of $6,000 in 2023.

• Any unused portion of the credit in 2023 carries over to the following year.

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Utilizing Vincere Tax, you'll be paired with a tax expert who will handle your taxes from beginning to end, tailored to your specific circumstances.

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I hope this information was helpful! If you have any questions, feel free to reach out to us here. I’d be happy to chat with you.

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Vincere Tax can help you with the tax implications of business taxes, stocks, bonds, ETFs, cryptocurrency, rental property income, and other investments.

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Being audited is comparable to being struck by lightning. You don't want to practice pole vaulting in a thunderstorm just because it's unlikely. Making sure your books are accurate and your taxes are filed on time is one of the best ways to keep your head down during tax season. Check out Vincere's take on tax season!

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This post is just for informational purposes and is not meant to be legal, business, or tax advice. Regarding the matters discussed in this post, each individual should consult his or her own attorney, business advisor, or tax advisor. Vincere accepts no responsibility for actions taken in reliance on the information contained in this document.