With spring right around the corner we could all use a little extra money in our pockets for anything from home improvements to vacation. Spring also brings tax time and the best opportunity to do just that with your tax refund. Let’s look at some ways to maximize your tax refund for the year to make you’re your spring really sprung.
Pay Uncle Sam More
One of the easiest ways to maximize your refund is to pay more taxes throughout the year. While this seems counterintuitive, this option does actually help in two ways. Imagine the IRS is your savings account. The more you put in your account during the year the more money you’ll have later to withdraw. Second, if you’re lucky enough to have a large increase in income or you started a side business, making estimated payments can help you avoid penalties and interest if you don’t pay enough during the year.
Fund Healthcare and Education by December 31st
Once you’ve optimized your payments, the next best thing to maximize your refund is to spend money. Again, this seems backwards, but if you spend money on certain things it can reduce the taxes you owe. If you funded a Flexible Spending Account (FSA) during the year, make sure to spend it on medical expenses because any amount left in there after December 31st gets taxed. Also if you plan on financing someone’s future education, contributing to a 529 account or other qualified savings account can reduce your state taxable income as well. Find out if a 529 Plan is right for you.
Fund Retirement by April 15th
If year-end has past don’t fret, there’s still options to maximize your refund. While FSA funds need to be spent before the year ends, there’s another type of savings account called a Health Savings Account, or HSA, for long term savings for healthcare. You have until April 15 to make a HSA contribution and claim it on your return for the previous year. This is great if you know you’ll have major medical expenses coming up and you can use your expected tax refund for funding. Can you save with an HSA?
Another tax saving option available before the April 15 deadline is to add money to an Individual Retirement Account (IRA). Money that you put into an IRA that’s already been taxed reduces your taxable income for the year. To claim this reduction to income, the contributions must be made to a traditional IRA and will be taxed on your distributions in retirement. Should you invest in a traditional IRA?
Max out on business deductions
If you’ve jumped into the gig economy or you run a small business full time, one of the best ways to maximize your refund is through increased deductions. When going through your deductions, leave no stone unturned. This goes for your home as well. Most small business owners use their home in some capacity for their business. You can claim a deduction for the portion of your home based upon the square footage used for business. The IRS has also made it super easy to calculate the deduction with a simplified method too so there’s no excuse.
Go back to school
Learning something new doesn’t just increase your knowledge. By going back to school it can actually increase your tax refund as well. There are a couple of ways the government reduces your tax bill for money you spent on education. First there is the American Opportunity Tax Credit (AOTC) which refunds up to 40% of eligible college expenses and can only be claimed for four tax years. After that comes the Lifetime Learning Credit which allows a credit for up to $2,000 in qualifying expenses and has no limit to the number of times you claim it.
Help the environment
Reducing your carbon footprint with solar panels or a smart thermostat isn’t just good for the planet, it also helps your pocket book too through special tax credits. The federal government and some states offer tax credits to offset the investment in energy efficient systems. These credits are typically spread out of several years, maximizing you tax refund for years to come.
Whatever route you choose in maximizing your tax refund, the underlying key is you have to spend money. The IRS will use different incentives for taxpayers to spend on things that benefit society as a whole. Whether it be improving your education, saving for future healthcare costs and retirement, or investing in energy efficiency, with a little planning you can count on Uncle Sam to help cover the cost.