Written by Nikki Ducas
It’s said the easiest way to get a bigger tax refund next year is to increase this year’s withholding from your paychecks. Now before you rush into your employer’s human resources office to make this change, understand that all you’re doing is allowing Uncle Sam to hold onto more of your money throughout the year only to give it back to you in a tax refund check. Wouldn’t you rather invest that money or put it into a pretax savings account? This is a great alternative if you are prudent about keeping enough money set aside to pay Uncle Sam after April 15.
Consider these action points to reduce taxable income and get a tax refund boost:
- Build Retirement Savings. Contribute to 401K or IRA to reduce taxable income. You can continue to count your contributions to Traditional and Roth IRAs until April 15, 2020, and contributions to a Traditional IRA will reduce your 2019 bill. My husband also tries to max out his allowable contribution to his 401K each year.
- Pay Medical Expenses with an FSA. Use your Flexible Spending Account (FSA) to pay for medical expenses and dependent care. FSAs are a valuable tool for lowering your tax bill by withholding money you use to pay for medical and child care expenses from your taxable income. We make sure to get our annual eye doctors appointments and order new glasses and contacts with any extra funds by December 31.
- Evaluate Filing Status. Reviewing your tax status, consulting your spouse when filling out your W-4 and taking advantage of tax credits can help increase your refund. The greatest tax credit we’ve received was the Adoption Tax Credit. We also file for the Child Tax Credit since our children are younger than 16 years of age.
- Increase Charitable Donations. If you itemize deductions, charitable contributions can trim tax liability and boost the amount of tax refund coming your way. Many donations may be tax deductible. When we used to itemize deductions, we gave donations to qualified charities and kept good records since all the information needed to be inputted into a 1040 return using Schedule A.
- Analyze Tax Loss Harvesting. Take a good hard look at your taxable investment portfolios for losers. If you sell the losers, you are creating taxable loss which can reduce your tax bill either directly or by offsetting gains. If you have a lot of taxable investments, it may behoove you to use a robo-advisor such as Betterment or Wealthfront that does this for you automatically.
- Use Tax Preparation Software or Hire a CPA. Both navigate tax laws and credits to get the biggest refund. TurboTax is easy enough to use to file personal taxes, however, it was strongly encouraged to hire a CPA to do my complicated business taxes. I’m happy I did because not only did he get me a bigger return but he also gave me these tips.
Start with one of these action items to boost your tax refund and then build on it. Financial buy-in, timing, and being a good steward with your money plays a big part in any monetary success.