What would you do with a larger tax refund? Use the money to pay off debt? Take a vacation? Save that cash for a down payment on your home?
Getting a lump sum from the IRS offers plenty of opportunity to do the things you enjoy the most and improve your financial picture. And if you’re eager to score a higher refund, here are a few key moves to make.
1. Know your tax credits and deductions
A tax credit is a dollar-for-dollar reduction of your tax liability, which makes credits very valuable. Imagine you owe the IRS $1,000 but get a $1,000 tax credit. That credit then knocks the amount you owe down to $0.
It also pays to see what deductions you’re able to claim. Tax deductions won’t reduce your tax liability the same way a credit will, but they’re still big money savers, because they effectively exempt part of your earnings from taxes.
For examples, if you get a $2,000 tax deduction, that’s $2,000 in earnings the IRS won’t charge you taxes on.
If you own a home and itemize on your tax return, you can deduct your mortgage interest, property taxes (or a portion thereof), and, in some cases, interest on a home equity loan. You can also deduct charitable contributions, provided you’re itemizing. Plus, there are some expenses you can write off without having to itemize, like educator expenses if you’re a teacher or interest on your student loan payments.
2. Fund your retirement savings
The more money you put into a traditional retirement savings plan, like an IRA or 401(k), the less taxes you’ll pay and the higher a refund you’re apt to score. Currently, you can put up to $6,000 a year into an IRA if you’re under 50, or up to $7,000 if you’re 50 or older.
With a 401(k), you get a chance to exempt even more income from earnings — up to $19,500 if you’re under 50, or $26,000 if you’re 50 or older. You should note, however, that a Roth retirement plan, though valuable, won’t help you increase your refund, since Roth accounts are funded with after-tax dollars.
3. Put money into a health savings account
Health savings accounts, or HSAs, work similarly to traditional retirement plans in that the money you put in them represents earnings you can’t be taxed on.
Those funds can then be used to pay for current or future healthcare expenses — the choice is yours to use them immediately or carry them forward, and if you take the latter route, you can invest the money you don’t use right away for added growth.
Currently, you can contribute up to $3,550 a year if you’re funding an HSA for yourself, or up to $7,100 if you’re contributing on behalf of your family. If you’re 55 or older, you can put in an additional $1,000 on top of whatever limit you qualify for.
There are certain criteria your health plan will need to meet for you to capitalize on an HSA, so do some digging to see if you’re eligible.
While some people would argue that a higher tax refund isn’t a good thing, since it represents having lent the government more money for nothing in return, the reality is that tax refunds are forced savings for some filers.
If you typically rely on a refund to pay major bills, fund larger home repairs, or do the things your regular paycheck won’t allow for, then it pays to do whatever you can to score the highest refund possible — and the above moves will help you do just that.
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Source: The Motley Fool