How to Reduce Taxable Income & Maximize Your Tax Refund
According to the IRS, about 75% of filers obtained a tax refund last year, and the typical direct deposit tax return was close to $3,000. However, some filers may not have received the tax result they anticipated last year, or they may be wondering if there are any new tax incentives available to assist offset the effects of 2020.
If you’re wondering how to max out your tax refund this year, in this article, we’ll discuss three suggestions to help you do just that—whether you got the refund you deserved, believe you might have gotten more last year or were influenced by the events of 2020.
How Much Does the US Make in Taxes Each Year
During the fiscal year 2020, the Internal Revenue Service or the IRS collected close to $3.5 trillion, processed more than 240 million tax returns and other forms, and provided more than $736 billion in tax refunds (including $268 billion in economic impact payments), according to the agency’s latest figures.
California, New York, and Texas have historically been the states that have gathered the most total tax from the IRS; these states have also historically been the states that have issued the most total refunds. The majority of the tax burden was borne by those with the greatest incomes. According to the most recent federal income tax data from the Internal Revenue Service, the richest 50 percent of all taxpayers paid 97.1 percent of all individual income taxes in 2018, with the remaining 2.9 percent paid by the poorest 50 percent of all taxpayers.
5 Ways to Boost Your Tax Refund
1. Take Advantage of the Tax Breaks Offered by Coronavirus Relief Measures
If the events of 2020 impacted you, there may be tax ramifications, and you may be eligible for tax relief under one of the coronavirus compensation packages passed in 2020. The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, as well as the Coronavirus Response and Relief Supplemental Appropriations Act, provided a slew of bailouts, including increased unemployment benefits and stimulus payments. Under the relief packages, stimulus payments are not taxable, and if you did not receive a full stimulus payment, you may be eligible to claim extra as a recovery rebate credit when you submit your taxes. The recovery rebate credit might boost your refund or minimize your out-of-pocket expenses.
If you were laid off or relieved of duty and obtained expanded unemployment benefits, you should be aware that unemployment revenue is subject to taxation; however, you may be qualified for income-based tax credits and deductions that you weren’t before, such as the saver’s credit or the child and dependent care credit. The CARES Act also includes a provision that allows taxpayers who claim the standard deduction to claim up to $300 in cash gifts to charity in addition to the standard deduction.
If you are self-employed and are ill, quarantined, or caring for a family member, the Families First Coronavirus Response Act may allow you to collect new tax credits called qualified sick and family leave credits.
You may be able to avoid the 10% early withdrawal penalty if you make a coronavirus-related withdrawal from your retirement account under the CARES Act before reaching the age of 59 and a half. In addition, instead of being included in your taxable income all at once in 2020, your dividends will be spread out over three years.
2. Save Toward Retirement
Maximizing retirement savings is the simplest approach to reduce taxable income.
In 2021, employees who work for a company that has a 401(k) or 403(b) plan can contribute up to $19,500 in pretax contributions. In 2021, those 50 and older can make a $6,500 catch-up contribution above the cap. Money saved in an employer-sponsored retirement account is a straightforward and direct way to minimize a tax burden because contributions are made pretax through paycheck deferrals.
Contributions to a standard individual retirement account (IRA) may be a wise alternative for those who do not have access to an employer-sponsored plan. For the 2021 tax year, the maximum contribution to an IRA is $6,000 (the same as in 2020), with a $1,000 catch-up provision for people 50 and over, and those contributions lower their taxes.
Employer-sponsored retirement plans may allow taxpayers (or their spouses) to deduct some or all of their standard IRA contributions from taxable income. The IRS has specific regulations concerning whether and how much they can claim based on their income.
The SECURE Act (Setting Every Community Up for Retirement Enhancement) was passed into law in December 2019. Traditional IRA contributions were unavailable to taxpayers beyond the age of 7012 in 2019 and previous years. The age restriction will be lifted in 2020. Taxpayers who are over the age of 7012 can contribute up to $7,000 per year and still obtain the full tax benefit.
3. Make Sure to Take Tax Deductions
There are several deductions that you may not be aware of, and many of them are frequently disregarded. The tax deductions you are eligible for can make a big difference in your refund. They are as follows:
1. State Sales Tax
You can figure out how much of your state and local sales taxes you can deduct using the IRS’s calculator.
2. Reinvested Dividends
Although this isn’t strictly a deduction, it can help you lower your overall tax bill. Include income from mutual funds that are automatically reinvested in your cost basis. You may be able to decrease your taxable capital gain when you sell shares this manner.
3. Out-of-pocket Charitable Contributions
Donating a lot of money isn’t the only way to obtain a tax break. Keep track of any other eligible minor expenses, such as the ingredients for the delicious cake you donated to the bake sale. You might be amazed at how quickly a few little philanthropic contributions can build up.
4. Student Loan Interest
You can deduct this even if you didn’t pay it yourself as long as you are the one who is responsible for it. If someone else pays the debt, the IRS treats it as if you were given the money and used it to pay the student loan, according to new rules. You would be qualified for the reduction if you met all of the criteria.
The American Rescue Plan makes significant modifications to the amount and method of claiming the child and dependent care tax credit for 2021. The plan raises the number of creditable expenses, softens the credit reduction due to income levels, and makes the credit entirely refundable. This implies that, unlike previous years, even if you don’t owe taxes, you can still obtain the credit.
Tax season is just around the corner, and you might be looking for ways to reduce your taxable income. Or maybe you want to maximize your tax refund. There are a number of strategies that can help with both of these goals – here’s how! Get in touch with TFX today to learn more about our services. We’ll answer any questions you may have and find out what we can do for you this year during tax time.