When the tax season opens, your main aim is to prepare you taxes correctly, and if possible, get the biggest tax refund at the end. This happens when your withheld taxes and tax credits exceeds the amount of tax you owe to the IRS. There are various legal ways you can use to increase your tax refund. Read on to learn some of these ways.
Take advantage of tax benefits provided by corona virus relief measures
For the tax year 2020, life wasn’t normal and jobs and business were disrupted by the Covid-19 pandemic. Also in 2021, things have not yet stabilized in most states. If you were affected by the pandemic, there are many tax benefits you can take advantage of to increase your tax refund. There are stimulus payments and expanded unemployment benefits. If you received any of these you can claim income tax benefits such as saver’s credit, child and dependent tax credit, qualified sick and family leave credits, among others.
Avoid standard deduction if you can Itemize your deductions
In the year 2021, the standard deduction is $12,550 for married filing separately and single filers. Married filing jointly can take $25,100, while the head of a household can take $18,800. Tax deductions aim to reduce your taxable income. When you take standard deduction it means you will take a flat rate deduction. When you itemize, you calculate every deduction you are entitled to and deduct it on the taxable income. If all your itemized deductions ranging from medical deductions, charitable donations to mortgage interest added together are more than the standard deduction, you should itemize. Therefore, take advantage of all tax deductions you are entitled to and itemize as that is likely to increase your tax refund at the end.
Claim relative or friend you have been supporting
If you’ve been supporting a relative or a friend for a whole year, and they didn’t earn more than $4,300, you can claim them as a dependent. However, there are many rules and guidelines on this, you are likely to get a dependent tax credit of up to $500. This tax credit will reduce your tax bill significantly.
Take advantage of refundable tax credits
Tax credits reduce your tax bill dollar for dollar while tax deductions such as medical deductions reduce your taxable income. This means tax credits are more important if you want to get a huge tax refund. There two type of tax credits – refundable and nonrefundable. Refundable tax credit will reduce your tax bill and if there is a surplus, you are entitled to get it as a refund. Nonrefundable tax credit only reduces your tax bill. Refundable tax credits include the earned income tax credit, child and dependent care credit, American opportunity tax credit (partially refundable) and the saver’s credit. Nonrefundable tax credits include mortgage interest tax credit, residential energy property credit, foreign tax credit among others. Take advantage of these credits when filing your tax returns, and you will get a bigger tax refund this year.
Make contributions to your retirement plan
Contributing to your retirement plan come with many benefits. When you make your contribution to IRA on time, you will enjoy tax deductions for up to $6,000 and you may qualify for the saver’s credit. On top of that, the IRS offers an additional credit of up to $2,000 for married filing jointly and $1,000 single filers.
Final Words
The above tips will help you get a bigger tax refund from the IRS this year. You only need to gather all the necessary documents and file your returns early. And the IRS will approve them, and deposit your tax refund within 21 days.
