Make the most of your tax refund in 3 steps
If you’ve watched TV lately, you have probably seen a slew of commercials from tax prep companies. The biggest of these services is H&R Block, who launched a new commercial series, proclaiming, “Get Your Billion Back, America!”
… And there’s good reason to be shouting such a proclamation. According to their research, Americans are giving the government an extra billion dollars every tax season in missed deductions and tax credits. You’d think that extra cash would be doing something to ease our federal debt, but Capitol Hill is hardly putting it to good use.
Of course, the solutions offered in these commercials are always the same –have a pro do your taxes – but is that really necessary? Not completely. Just like other financial issues (particularly those that involve a government agency), you can do the work yourself to save money or pay a professional to do it for you to save time. Often the latter helps you avoid missing opportunities, because you’re paying an expert to apply their knowledge to your situation.
Either way, it’s good to at least know where you should be looking if you want to maximize the check you get back from the IRS this year.
Step 1: Identify exemptions
Every taxpayer is allowed to claim one personal exemption for themselves, as well as one per dependent. This includes a spouse, as long as they aren’t included as a dependent for someone else. You can even claim an exemption for a person filing on their own, as long as you support them and they’re listed as a dependent for you.
Each year you can claim an exemption up to a certain amount – for 2013, it’s $3,900. In the most basic sense possible, this exemption decreases your total taxable income. In turn, this increases your tax refund since this money has already been withheld from your paychecks.
Step 2: Find deductions
For tax deductions, you have two options: standard deductions and itemized deductions. Standard deductions are what you deduct if you don’t want to provide an itemized account of your deductions.
These are the standard deduction caps for 2013:
- $12,200 for married couples filing jointly
- $8,950 for a head of household
- $6,100 for individuals
- $6,100 for married couples filing separately
If you have a lot of deductions and you can account for all of them, then you may be better off doing itemized deductions. This is where you spell out each deduction you have, but there are limits here, too:
- $300,000 for married couples filing jointly
- $275,000 for a head of household
- $250,000 for individuals
- $150,000 for married couples filing separately
Keep in mind that for itemized deductions, you may need to find a good list of 2013 Tax Deductions, because there are little-known and rarely used deductions that can save you big if you’re doing itemization.
Step 3: Check your tax credits
Tax credits are another way to reduce what you owe. You literally get “credit” for certain things you’ve done throughout the year, like buying your first home, having or adopting a child, or pursuing higher education.
Just like tax deductions, check carefully to make sure you noted all of the credits you can receive. There are tax credits for a wide variety of things and they aren’t always easy to guess. For instance, if you host an exchange student, there’s a tax credit for that. There are also credits for improving your home’s energy efficiency and buying an electric car.
Why you might be better off with a professional
The government tends to make things more difficult than they have to be, and tax code is the prime example. Filing on your own can be messy and you can miss things – contributing to that billion dollars in free money that goes to Uncle Sam every year. If your taxes aren’t straightforward (i.e. you’re not a W2 employee who doesn’t have a lot of special considerations) then you may be better off going with a professional. It’s up to you, but if you want to ensure you don’t leave money on the table, you may want an ally. In that case, you’ll save more than you pay a professional.
Still paying off last year’s tax debt?
If you are then any refund you might get this year will be garnished. But that doesn’t mean you should just avoid filing, because this leads to some really bad penalties. Instead, file your taxes for this year and find a tax debt solution that will help you make a plan to pay off anything you owe for previous years.