The only thing that ruins the charming spring mood for you is the tax season. We know planning for the tax season can be frustrating, especially when you run a business. Even worse, if there’s one thing different about the 2023 tax season, it’s the fact that all the extra benefits are gradually fading away. From the pandemic tax breaks to the stimulus paychecks, it’s hard to track what is left to explore with an amateur’s experience.
But we still have to reduce that tax money, right? And a refund can help you achieve just that. How do you ensure your tax plan is smart enough to help you maximize your it? Here are five things that could impact your tax refund.
- Filing Status:
Your filing status can make a big difference in how much income taxes you owe. For instance, if you take home $80,000 every year, the amount of tax you will pay depends on which filing status you qualify for. Your decision to file single, jointly, separately, head of household, or qualifying surviving spouses will determine if you’ll pay as low as 10 % or as high as 35% income tax. It’s essential to fill out the right filing status you are eligible for, which will likely give you the most tax advantage.
Claiming a dependent can heavily impact the amount of refund you get on your income taxes. If you claim a dependent on your tax return, you’ll become eligible for numerous tax credits and deductions that will increase your tax refund, some of which include the Child and Dependent Tax Credit, Earned Income Tax Credit, and American Opportunity Tax Credit.
The Child Tax Credit for 2022 is up to $2,000 per qualifying child under 17. Also, if you keep your kids in the daycare during the week while you and your spouse work, you will qualify for the Child And Dependent Tax Credit which pays for about 25% to 35% of your childcare expense between $2,100 and $6,000 for two or more qualifying depended.
- Tax Deductions And Credits
People often mistake tax deductions for tax credits. While both can reduce your tax bill and increase your tax refund, they work differently. A tax credit reduces your tax bill dollar for dollar, saving you more money. So if you have to pay $5,000 and get a $4,000 tax credit, your tax bill will decrease to $1,000. A tax credit can be refundable or non-refundable. While both could reduce your taxes to zero, a refundable credit has added benefit. The reason why is that if there’s any amount left over from your refundable credit after reducing your tax to zero, you get the balance back as a refund
A tax deduction, on the other hand, reduces your taxable liability by reducing your taxable income, so if you owe 22% in taxes on an income of $50,000, you would owe $11,000 in taxes, but if you had a tax deduction of $10,000, that would lower your income to $40,000, which means you’ll pay less income tax.
What helps you make the most of your deduction or credit is providing enough information so your tax strategist can help you identify the many tax breaks you can claim.
- Adjusted Gross Income(AGI)
Your Adjusted Gross Income (AGI) can directly impact the deductions and credits you are eligible for and will reduce the amount of taxable income you report on your tax return. Your AGI affects the size and eligibility for deductions and credits, how much social security is taxed, and more. The lower your AGI, the higher the number of deductions and credits you can claim, and the lower your tax bill. Your AGI is so important that when your prior AGI is wrong on your tax return, the IRS will reject your return, and you’ll have to fix the amount again.
- Standard Deduction And Itemized Deductions
Both standard deduction and itemized deduction determine how much tax refund you get. The difference between the two comes down to simple maths. A standard deduction is a fixed dollar amount that reduces the income you’re taxed on. The standard deduction reduces your income by one fixed amount, while itemized deduction includes a list of eligible expenses. The amount you get from the standard deduction depends on your filing status. For the tax year 2022, the standard for single taxpayers is $12,950 for single taxpayers, $25,900 for Married filing jointly or qualifying surviving spouses, and $19,400 for the head of household.
Itemizing your deduction is better when the total of your itemized deduction is more than the standard deduction. The reason why is that it can increase your refund because you’ll owe less federal income tax. When you itemize, rather than taking the standard flat rate, you would need to list all your deductions separately.
How To Get A Bigger Tax Refund If You Have No Dependents
- Choose To Itemize Deductions
Itemized deductions give you a higher chance of reducing your tax liability than standard deductions, so where possible, use itemized deductions. While you don’t want t to itemize unnecessary expenses, you can choose to itemize your charitable donations, medical expenses, and personal properties.
- Take Advantage Of New Tax Credits
If you don’t have dependents, taking advantage of every new tax credits you are eligible to can help you increase your refund, even if you don’t itemize. You can take advantage of more environmental-related credits from the new Inflation Reduction Act, buy an electric car, install an electric heat pump, or add solar panels to your home and get a tax credit for it. The reason why is that these new tax credits can last for up to 8 or 10 years.
- Maximize Your Retirement Contributions
Another way to increase your tax refund and save money at the same time without having a dependent is to maximize your retirement contributions. Putting money in retirement accounts such as a 401K or IRA reduces your taxable income and grows your retirement portfolio. The more you save in your retirement account, the more you save on taxes.
- Remember Your Healthcare Savings Account.
Contributing to a health savings account helps you save for your healthcare expense and income taxes. If you have high-deductible health insurance based on the IRS criteria for the tax year, you can make pre-tax contributions to reduce your taxable income. This is because the money grows tax-free, and you can withdraw it tax-free when you want to use the funds for eligible healthcare expenses. You could also use your Flexible Spending Account for your healthcare expenses. However, the FSA funds have year-to-year rollover limits.
Is Getting A Large Refund Bad?
As a business owner, getting a large refund might seem like a huge favor, but it means the government has collected too much from you all year long and is just refunding the money you overpaid in taxes. Wouldn’t you instead channel that money back into your business or invest it into more profitable things?
On the other hand, if you withhold far too little, your take home would increase, but you might run the risk of owing the IRS the following year, and if you withhold too much, you would be giving the IRS more money than required. This is why you need a smart tax plan. Working with a tax strategist like Tax Goddess helps you balance the scale legally so you never have to leave your money hanging in the hands of the IRS when you could have done something better with it.
What Not To Do With Your Tax Refund
You can do whatever you want with your refund because it’s your money, but you also have to make smart choices, so you won’t be paying more taxes, here is a list of things you shouldn’t do with your refunds.
- Investing In Depreciating Assets
Invest your tax refunds on things that add real value to your life and aren’t a financial liability. With a few extra thousand dollars as your refund, you might be tempted to make a down payment on your dream car or boat, but now’s not the time. Before making that down payment, consider the cost of insurance and personal property taxes in the long run.
- Investing In Hot Stock
Doubling your money with hot stock may seem like the first choice when you get your tax refund, but there are no guarantees in the stock market. Rather than investing in a hot stock, consider safer investments such as individual retirement accounts.
- Keeping Your Attached To A Debit Card
Keeping your tax refund attached to your debit card means you might be tempted to splurge because you can easily access it. It’s better to invest or save your money as emergency funds.
- Spending Money Without A Plan
When you get your tax refund, devise a financial plan on how to allocate funds to avoid spending on insignificant things. Without a plan, you might end up exhausting your refund on short-term financial goals that yield no return.
Maximizing the possibility of getting a bigger tax refund is a great way to reduce your tax burden, but it is also essential to understand that getting a big refund could mean you are overpaying your taxes and giving the government an interest-free loan. Striking a balance between getting a refund and having more money in your pocket helps you remain financially stable, and that is why you should work with a tax strategist like Tax Goddess that reduces your overall tax burden and helps you stay financially afloat so you have enough to live your dreams.