The April 15 tax deadline may seem far away now, but it’ll be here before you know it. To save yourself the stress and avoid a long wait to receive your refund, it’s best to prepare your taxes now rather than later. Not only that, but starting early gives you plenty of time to find new ways to lower your tax bill and get a larger refund. And after a particularly difficult year like 2020, that’s something every taxpayer can appreciate.
To ensure you get the most money back from the government, follow these tips from the US News My Money experts.
Claim Tax Benefits Offered By The CARES Act
Were among the millions of Americans who experienced a financial hit during 2020? Then you might qualify for some of the measures provided by the CARES Act and the recent Coronavirus Response and Relief Supplemental Appropriations (CRRSAA) Act.
Both relief bills offered aid, such as supplemental unemployment insurance and stimulus checks. Under the CARES and CRRSAA Acts, you do not have to pay taxes on your direct payments (if you didn’t receive your benefit, you would need to claim it under the Recovery Rebate Credit). This credit can boost your refund or reduce your tax bill.
On the other hand, enhanced unemployment benefits are taxable. But, you could qualify for the saver’s credit, the child and dependent care credit, or other income-based tax benefits — even if they were ineligible in the past.
The CARES Act allows those who claim the standard deduction to take an additional above-the-line deduction for charitable contributions up to $300. It also waives the 10% penalty for early withdrawals on 401(k)s and other retirement vehicles and lets savers pay income taxes on these distributions across three years, rather than a lump sum on their 2020 income.
Moreover, the Families First Coronavirus Response (FFCR) Act offers qualified sick and family leave, a new tax credit for the self-employed, those who contracted COVID-19, cared for a relative, or were forced to self-isolate.
Itemize Your Deductions If Possible
President Trump’s 2017 tax law and the coronavirus relief bills included several sweeping tax reforms, such as doubling the standard deduction to $12,400 for individuals and $24,8000 for spouses while eliminating or curtailing other deductions. Because of these changes, most taxpayers take the standard deduction (90%, according to TurboTax) instead of itemizing.
Although the standard deduction can significantly lower your tax burden, taking the time to collect your records and itemize your deductions could give you a bigger payoff. But if you’re near the threshold for standard deductions, make sure you keep extra costs that could leave you ineligible for the standard deduction in mind. This would include qualified charitable contributions, gambling losses and winnings, a new home loan or refinanced mortgage, or losses attributed to a declared disaster).
Claim Friends Or Family Members You’ve Been Caring For
Whether it’s your brother, partner, or a friend, you might be able to claim them as a dependent if you’ve been caring or supporting them. Of course, there are eligibility guidelines, but you might qualify if:
- The individual is someone outside of your family who has lived under your roof the whole year (this rule doesn’t apply to relatives)
- You pay for more than half of their care/support
- The individual earned less than $4,300 in taxable income last year
While the dependent exemption is no longer available, you can claim the non-child dependents tax credit, worth up to $500.
Claim Above-The-Line Tax Deductions If You Qualify
Above-the-line deductions lower your taxable income without having to itemize. Examples of above-the-line tax deductions include:
- Teachers who footed the cost of school supplies or personal protective equipment (PPE)
- Individuals who enrolled in continuing education courses for career purposes
- Alimony payments (if the divorce was finalized prior to 2019)
- Self-employment taxes
- Student loan interest payments
- IRA contributions
- Active service members who covered their own moving expenses
Lowering your taxable income could have the added benefit of a larger advanced premium tax credit if you received government aid to cover the cost of health insurance.
Take Advantage Of Refundable Tax Credits
According to US News My Money, a tax credit is “a dollar-for-dollar reduction” of your tax liability. A refundable tax credit like the earned income tax credit can lower your taxes to the point where the government may end up owing you money instead.
For example, a household with more than three children could receive as much as $6,600 from the earned income tax credit. The IRS notes that one in five Americans who qualify for this benefit never claim it, so you should make sure you don’t miss out on this valuable benefit.
- Greene-Lewis, Lisa. “How to Get the Biggest Tax Refund This Year.” U.S. News & World Report, U.S. News & World Report, 15 Jan. 2021, money.usnews.com/money/blogs/my-money/articles/how-to-get-the-biggest-tax-refund-this-year.