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Tax season: This time of year either excites you or makes you afraid. Many people like to think about how much they'll be getting back in refunds, but many forget that there's much more than just the amount at stake.
This post will discuss tips on maximizing the amount of refund money you receive when filing taxes this year.
1. Know available deductions and your exemptions
The first step in maximizing your refund is to know what deductions and exemptions are available to you. Many people don't take advantage of these because they need the necessary time or knowledge, but understanding them is essential.
There are several deductions you can take to reduce your tax bill. You will need to know which ones apply to you.
If these deductions leave you with less money to get the maximum refund, consider filing an amended return instead of an original one. This will allow for more time before it has even been processed by the IRS and thus allow for additional savings on interest charges.
The IRS website has a guide to the available deductions and exemptions, along with examples of each. This will help you determine if there's anything you can do to increase your refund.
Examples of tax deductions available
Tax exemptions are available for individuals and businesses to use to reduce their taxes.
The main types of tax exemptions are as follows:
1. Earned Income Tax Credit
Earned income tax credit is a refundable tax credit that lessens the financial burden of taxes on low-income working households. The EITC can be claimed by a taxpayer who has earned income and doesn't have any other sources of income to claim.
The amount you get back depends on your filing status, age, and the number of children under 18 year’s old living with you at the end of each year.
2. Advance Child Tax Credit
Parental tax credits include the child tax credit. It's based on the child's age, family income, and whether or not you have other children. The credit ranges from$1,000 to $2,500 per child depending on whether they are under six years old or older than 18 at the end of their first year of school since starting kindergarten (if they're still in school).
The IRS makes payments for the child tax credit in advance equal to 50% of the expected amount of the credit that you can claim on your 2022 tax return.
If the IRS processed your 2021 tax return or 2020 tax return before the end of June2022, these monthly payments began in July and continued until December 2022,based on the information in that return.
3. Tax Benefits for Education
Making sure you pay the least amount of taxes is one of the best methods to save money on taxes. The more money you save, the more money can be spent on other things.
An education credit reduces the tax owed on your tax return, which helps with the cost of higher education. You can be qualified for a refund if the credit lowers your tax obligation to less than nothing.
There are two different categories of tax credits available for education: the American Opportunity Tax Credit and the Lifetime Learning Credit.
4. Energy Tax Incentives
A government-sponsored incentive known as an energy tax credit lowers the cost of alternative energy sources for both consumers and businesses.
When paying income taxes, eligible individuals or entities who meet the criteria are reimbursed for their efforts to make the planet "greener," with the credit amount being deducted, dollar for dollar, from the total amount owed to the Internal Revenue Service (IRS).
Several federal energy-related tax breaks are currently in effect. Each has its requirements and serves a different population segment, with some aimed at individual homeowners and others at businesses.
5. Tax Relief in Disaster Situations
The tax code may provide some relief to taxpayers affected by a disaster. When the return or payment's original or extended due date falls within the disaster period, the IRS may grant taxpayers affected by a federally declared disaster or a significant fire additional time to perform certain time-sensitive acts, such as filing returns and paying taxes.
Furthermore, affected individual and business taxpayers in a federally declared disaster or a significant fire area may obtain a tax refund faster by claiming disaster-related losses on the previous year's tax return, usually by filing an amended return.
6. Federal Tax Deductions for Charitable Donations
The IRS allows individual taxpayers to deduct charitable contributions in accordance with the guidelines set forth by the Tax Code.
The majority of the time, the number of monetary donations to charities that taxpayers can deduct as an itemized deduction on Schedule A is limited to a percentage (usually 60%) of the taxpayer's adjusted gross income (AGI). This restriction does not apply to qualified contributions.
Individuals can deduct up to 100% of their adjusted gross income as qualified contributions. A corporation may deduct up to 25% of its taxable income ineligible contributions. Contributions in excess of that amount may be carried forward to the following tax year.
To be eligible, the contribution must be:
● Made to a qualifying organization
● Made during the calendar year2020.
Non-cash contributions are not eligible for this relief. Taxpayers, subject to normal limits, may still deduct non-cash contributions.
2. Build your retirement savings
Another step to getting your maximum tax refund is building up a retirement savings account. There are many retirement savings accounts, and they vary in terms of their benefits, fees, and other features.
The most common types are 401(k)s and IRAs (Individual Retirement Accounts).
● 401(k)s: These plans help you save for retirement by letting you contribute taxes on income while earning money from work instead of paying them out in the form of taxes or into another type of investment account that might not be as safe or liquid as a traditional IRA would be.
● IRAs: These accounts offer different features, including tax-deferred growth potential and no required minimum distributions until age 70½ or later, depending on how old you get when starting this type of account.
If you are contributing to a retirement plan, whether pre-tax or after-tax, the money used to fund the account comes from your paycheck before taxes are owed. You can use this money to reduce your taxable income in the year you contribute.
For example, if you put $1,000 into an IRA each month over two years and then paid$300 in federal income tax on those same two years (assuming that all other sources of income were taxed at 15%), then by saving for retirement early in life with pre-tax contributions — which reduce taxable income — could help offset some of those taxes at lower rates than what would be available otherwise.
If you're eligible to make Roth contributions, they are made with after-tax dollars. Earnings and donations can both be withdrawn at any time without incurring penalties, and you can withdraw earnings (but not your contributions)from a 401(k) plan at any time without penalty if you are age 59½ or older.
3. Pay for your medical expenses with an FSA
Flexible Spending Accounts (FSAs) are also known as "Health Savings Accounts" or "Health Reimbursement Arrangements."
A Flexible Spending Account (FSA), a "flexible spending arrangement, "is a particular account into which you deposit funds and use them to pay for certain out-of-pocket health care expenses.
You do not have to pay taxes on this money. This means you'll save the same amount you would have paid in taxes on the money you set aside.
Employers may contribute to your FSA but are not required to do so.
When you utilize an FSA, you submit a claim to the FSA (through your employer) with documentation of the medical expense and a declaration that it is not covered by your plan. You will then be reimbursed for your expenses. Inquire with your employer about how to use your particular FSA.
What you need to know about FSAs
They are limited to $3,050 per employer annually. If you're married, your spouse can contribute up to $3,050 to an FSA through their employer.
If you're married and have dependents, you can use your FSA funds to cover some of their medical and dental costs.
● FSA funds can only pay deductibles and copayments, not insurance premiums.
● FSA funds can purchase prescription and over-the-counter medications with a doctor's prescription. Insulin reimbursements are permitted without a prescription.
● FSAs may also be utilized to pay for consumables like bandages, medical equipment like crutches, and diagnostic tools like blood sugar test kits.
4. Make charitable donations
You can write off charitable contributions against your taxes. Giving money to a charity is seen as a donation and is therefore exempt from taxes.
You can't deduct donations made to political organizations or religious organizations; however, you can use this method to deduct any amount of money you donate toward non-profit organizations run by yourself (e.g., an art gallery).
How much can you deduct?
In general, charitable donations can be deducted up to 60% of your adjusted gross income. However, depending on the organization and the sort of gift, you could only be able to donate 20%, 30%, or 50%. (there is a lesser limit for contributions to certain private foundations, veterans groups, fraternal societies, and cemetery associations, for example).
The limit applies to all donations made throughout the year, regardless of how many organizations you support.
Contributions that exceed the limit are frequently deducted on your tax returns for the next five years or until they are depleted through a process known as carryover.
5. Consult a tax professional
If you need more clarification about your situation, consult a tax professional.
Ask a certified public accountant (CPA) if you need help with getting your maximum refund. They have the experience and knowledge of all the various ways that taxpayers can maximize their refunds.
If a taxpayer is already getting a large refund but wants to reduce it in the future, this will also be discussed with them by their accountant or lawyer.
A tax professional can help you make sure your taxes are filed correctly. They can also help you understand what deductions and credits are available to you so that you can take advantage of all your money rightfully.
If you follow these tips and can maximize your tax refund, then we're sure you'll be happy with the results. Look at the exemptions and deductions you qualify for and consult a professional to truly maximize your deductions.