How to Maximize Tax Refunds

Everyone wants to know how to get the largest tax return possible. Failing to take the deductions and credits you’re entitled to could add up to thousands of missed dollars over the years. 

With tax-filing season upon us, it should come as no surprise that people want the secrets to how to maximize tax refunds. The truth of the matter is that it’s actually not that difficult to maximize your refund if you know what to do. The experts at Porte Brown have put together a quick guide on getting the largest tax return possible, so simply follow these strategies when doing your taxes this year.

How to Maximize Tax Refunds

Getting the largest tax refund possible should be your priority. You may be surprised at how much you are entitled to. Several strategies could apply to your situation so before combing through your taxes, keep these techniques in mind.

Claim Every Dependent Possible

The child tax credit and the child and dependent care credit is the reason why so many people get large tax refunds. Anyone who cares for an elderly relative in their homes or someone with children under the age of 18 will be entitled to a tax credit.

Note that due to the onset of the COVID-19 pandemic, many people will receive lower refunds because of advanced child tax credit payments. In other words, if you ordinarily claim this credit, chances are you may have already claimed this year’s credit last year.

The American Rescue Plan Act raised the child tax credit value to $3,000 per child and $3,600 per child under six.

For the 2021 tax year, the child and dependent care credit increased in value to $8,000 for a single qualifying individual and $16,000 for two or more individuals. If you have a child under 13 or someone who is physically or mentally unable to care for themselves, you are eligible for this credit.

The difference this year is if you claimed advanced payments in 2021, you’ll need to reconcile those payments. If you didn’t claim them, it’s business as usual.

Finally, if you are divorced from your spouse, you need to remember that only one parent may claim a child on their tax return. Dependents can only be claimed on a single tax return, with no exceptions.

Don’t Assume the Standard Deduction is the Best Course of Action

The 2017 Tax Cuts and Jobs Act doubled the standard deduction from 2018 through 2025. The Federal government wanted more people to take this deduction and avoid itemizing. Many taxpayers will find that the new and improved standard deduction is the best move.

However, if you have more complex tax returns, or you are a higher net-worth taxpayer, itemizing is likely still the way forward. When figuring out how to maximize your tax refund, it’s essential to calculate your taxes both ways to see which grants you the largest refund.

For example, if you’re single with a large mortgage and you like to make regular charitable contributions, the chances are you will still be better off by itemizing.

Deduct All Charitable Contributions

It’s incredible how many taxpayers are unaware that contributions to qualifying charities can invite a tax deduction. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 allowed for people who take the standard deduction to subtract their charitable contributions temporarily.

Under the terms of this act, nonitemizers could claim $300 for cash contributions and $600 if you are married and filing a joint return.

People who usually itemize don’t need to do anything differently.

Hire a Professional Tax Accountant

Knowing how to maximize your tax return requires years of experience. The rules change all the time, particularly now, and staying on top of all the rules and regulations is tricky. Unless you are willing to dedicate hours of study to the tax code, you should hire a professional tax accountant.

Hiring a tax expert is not something reserved exclusively for the wealthy. On the contrary, this is an investment that can save you thousands of dollars.

Mistakes happen, and the last thing you want is to get audited. Speaking to a professional not only ensures you are claiming everything you’re entitled to, but also not claiming credits and deductions that you don’t qualify for.

Get in touch with Porte Brown, one of the top accounting firms in Chicago, and meet the team. We’ll be able to go through your returns and maximize your tax refund using our in-depth knowledge and years of expertise.

Make Contributions to Your Retirement Fund

Relying on Social Security during your golden years will not be enough to give you the comfortable lifestyle you expect. All Americans should be saving money in their retirement funds to guarantee the standard of living they aspire to enjoy.

It is never too late to contribute to a traditional IRA. Currently, the contribution limit is set at $6,000, but there are limitations based on how much you earn. Calculate your adjusted gross income and see what your limits are.

Believe it or not, the end of the calendar year is not your last opportunity to contribute to the year behind. Taxpayers can continue to make contributions up to the maximum limit until the 2022 tax filing deadline.

Look for Lesser-Known Tax Credits

A tax credit is the most valuable tool at your disposal when figuring out how to maximize your tax refund. Take the time to go beyond the earned income tax credit and the child tax credit. Lesser-known credits often go forgotten, but can pack quite the punch.

While lesser-known credits are rarely worth as much as the big ones, claiming lots of minor credits can still add up. For example, you could claim the adoption tax credit, the home office tax deduction, or the Federal solar tax credit. Study these credits and find the ones that apply to you.

Another credit that’s commonly missed is the non-business energy credit. If you own any energy-efficient appliances in your home that meet a minimum energy rating, you could claim up to $500 for investing in America’s green future.

Take Advantage of Education Tax Credits

Eligible students can claim education credits on their taxes. There are two major tax credits available. One is designed for your initial four years of higher education, whereas the other applies to any form of post-secondary education.

First is the Lifetime Learning Credit, designed for students who are studying. It is available to nearly all students, and you don’t need to be studying to obtain a degree. The credit is worth up to $2,000.

If you’re a student with less than $58,000 in annual income or $116,000 if married and filing jointly, you can take the Lifetime Learning Credit.

Note that this tax credit is nonrefundable, meaning it will reduce your tax bill, but it won’t lead to a refund.

The American Opportunity Tax Credit is designed for students during their initial four years of post-secondary education. Previously known as the Hope Credit, you must have a modified adjusted gross income under $80,000 if single and $160,000 if married and filing jointly. Plus, you must be enrolled on a half-time basis for one academic year.

This credit is refundable but only up to a point. Only 40% of the credit is refundable. If eligible for the maximum amount, you could receive a $1,000 tax refund.

Invest for Long-Term Capital Gains

Investing is essential for your future, but it can lead to you facing a serious tax bill when mishandled. Tax-efficient investing enables you to keep more of your money, whether you invest in stocks, bonds, precious metals, or real estate.

Capital gains taxes fall under either short-term or long-term. Short-term capital gains taxes range from 10% to 37% of the profits, depending on your income. Long-term capital gains taxes enjoy preferential tax rates of 0%, 15%, and 20%, depending on your income.

You must hold an asset for a minimum of one calendar year to qualify for long-term capital gains. Simply having an asset for an extra month or two can send your capital gains taxes into a lower bracket.

Investing to reduce your taxes is a far more complex issue, making it essential to hire a professional in this scenario.

Your income plays a significant role, so strategically managing your assets is crucial. For example, if you plan to offload some of your assets when you retire, it makes sense to do it a year after you retire because then your annual income would be much lower.

The lower your income, the less tax you pay even when qualifying for long-term capital gains.

Use a Health Savings Account (HSA)

If you hold a high-deductible health insurance plan, the IRS permits you to use an HSA to cut your taxes. Like your 401(k), your employer's HSA contributions can be matched via payroll deduction. These deductions are exempt from your taxable income.

Likewise, direct contributions into an HSA are also tax-deductible in their entirety. There are limits on how much you can contribute per year. In 2022, the maximum contribution rate is $3,650 for individual HSA accounts and $7,300 for family HAS accounts.

These funds are also allowed to grow without incurring any additional taxes. You’re allowed to withdraw the money at any time. However, you can only initiate withdrawals for qualified medical expenses without being taxed.

When used correctly, HSAs are an excellent way of covering your healthcare expenses while sheltering more of your money.

Tax Return FAQs

Getting the largest tax refund available is difficult, and it’s easy to be confused. Let’s answer some of the most common questions from taxpayers about return amounts and  how to maximize tax refunds.

Why is my refund so low?

Your refund is based on how much you earn and how many credits/deductions you qualify for. In 2022, most people can expect reduced refunds due to the advanced payments of the previous year. Pandemic support and the bringing forward of certain tax deductions means your refund may be lower than expected.

Other reasons also contribute to why your refund is so low. For example, if your tax filing status changed or you earned more in the previous tax year, you can expect to get less back.

Also, remember that many of the most common tax credits are nonrefundable. Once the amount of tax owed hits zero, you lose the rest of the credit’s value.

Can your tax refund be more than you paid?

It depends.

The basic concept of a tax refund is that you receive money from the Federal government when you withhold too much from your paycheck. However, some tax credits are refundable. If you owe zero in taxes, a refundable tax credit essentially gives you free money.

The earned income tax credit is an especially valuable refundable tax credit millions of Americans qualify for.

What is considered a large tax refund?

The average IRS refund currently stands at $3,536, $800 higher than last year. The drastic increase in the average can be explained by many taxpayers postponing their pandemic support payments or not taking their advanced payments.

A large tax refund should be considered anything above the average. Likewise, your situation will also define the size of your tax refund. Factors include your income and how many dependents you have claimed.

What is the largest tax return ever filed?

Unfortunately, the IRS doesn’t release this data to the public to protect taxpayers' privacy. Most substantial tax refunds are IRS mistakes or errors on behalf of taxpayers.

Regarding the largest tax refund by city, Midland, Texas, enjoyed a $3,800 average tax refund in 2018. Six of the top 10 cities with the highest average refund are in Texas, which levies no state income taxes.

Maximize Your Refund with Porte Brown

There’s no getting around it: taxes are confusing. Naturally you want the highest return possible, but unfortunately there’s no easy way to do it. Maximizing tax returns requires careful strategy and intimate knowledge of the tax code as it stands today. Stay on top of your taxes with the support of Porte Brown.

A top accounting firm in Chicago, our accountants are experts in helping hardworking American taxpayers get the most from their returns. Get the professional advice and tax filing service you need and make filing your taxes a breeze. We also offer IRS audit help for those who need it.

To learn more about our services, contact Porte Brown today.

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