So now that the Happy New Year smoke has cleared and the New Year's resolutions are settled in, the next big thing that is on everyone's mind is their tax refunds! We work hard and meet our obligations, all for the year end bonus from our dear friend, Uncle Sam. But is it a bonus?
With the upcoming elections, Occupy Wall Street, and the disdain for "The 1%," many people cringe at the many tax benefits that the rich are able to get, but I have good news! These breaks are not only for the rich!
The following 10 tips can be used by everyone, no matter what your net worth is, to maximize your refund! Remember.... Recoup! Reinvest! Revitalize!!
1) Check Your Withholding (Increase if necessary)
If you're employed full time, the first thing you should do is check your withholding and increase it, if necessary. When you were hired, you completed an IRS tax form called a W-4 which determines your tax withholding.
Your tax withholding determines how much money is going to be withheld from your paycheck each pay period. Many people do not understand its implications and are likely to choose 0 or 1 which is a number that represents your exemptions.
I remember when I first started working people would advise me to claim zero so I can get more money back at the end of the year. However, when you claim the least amount of exemptions, more money is withheld from your paycheck for tax purposes. In essence, you're giving the government an interest free loan on your money that could be used
for your own personal savings.
In the reverse, when you claim more exemptions, less money is withheld in taxes - which is the better option and what I would recommend. Increase your exemptions enough so that you are paying the IRS exactly or close to what you would owe in income tax. The extra money that you will now receive in your paycheck should be used for saving, investing, and making your money work for you.
Be careful that you are not increasing your exemptions just for the sake of increasing them, because if the exemptions are not justified you can wind up owing money, and we definitely don't want that!
2) Deduct All Donations
There are two universal laws that I live by; "the more you give the more you get" and " to whom much is given, much is required." Not only is giving back a noble thing, but it can also give you substantial tax
savings. If you made donations to a charity, you may be able to use them as deductions on your taxes. To qualify, your donations have to be made to a nonprofit organization that can prove they have 501(c)(3) tax status. Legitimate charities usually have their status clearly stated on their websites, or you can verify it directly from the IRS by
visiting www.IRS.gov/charities, then click on the tab that says 'Contributors.'
The second criteria is that you must have a receipt from your donations. Not all of your donations count, and there are limits on what can be deducted, so make sure you check with an accountant to verify your eligibility. Some common deductions include real estate, furniture, clothing, cars, electronic equipment, office supplies, mileage, cash donations, and tithes paid.
If your job requires you to have or use equipment that you purchased out of your own pocket, and they do not reimburse you, then you may be able to deduct them on your taxes. Some examples include subscription costs for professional publications that keep you updated on how to perform your job better and professional dues paid to a union or professional organizations. Also, if you use your personal phone for work, then the portion used for work may be deducted. Some expenses, like uniforms and transportation, may not be deductible. Again, make sure you consult an accountant to verify eligibility.
4) Review Your Filing Status
Claiming single, head of household, married filing separately, or jointly, etc., can significantly influence the amount of money you receive in your refund. Your status may change due to a life event such as getting married, divorced, or losing your spouse due to death. Most of these life events can make you eligible for a larger refund. Generally, if you are married, you may expect a larger refund if you file jointly. Filing together usually lowers your overall tax bill and
can offer some tax breaks unavailable to those filing separately.
There are some reasons, however, that couples may want to file separately. If one has a large amount of debt like unpaid medical bills, behind on child support or student loans it may be in the others best interest to file separately.
5) Don't Forget the Family
Taking care of kids and possibly parents who are aging can be very expensive now-a-days. Most people don't know but much of the cost for caring for your family can be tax deductible. This includes fees paid for dependent care and health care expenses. Using these deductions can really save you a pretty penny on your taxes. Alimony is a another expense that can be deducted but not child support.
6) Pay Yourself First (Increase IRA Contributions)
In my book, Mind Right, Money Right: 10 Laws of Financial Freedom, paying yourself first is one of the wealth principles needed to create financial freedom. As it relates to your tax refund, it is one of the most highly recommended ways to increase how much you receive back. Contributing to your IRA (which stands for Individual Retirement Account) not only allows you to save for your retirement, but it also lowers your total taxable income
because it comes off the top. The more money you put into an IRA, the less of your income is subject to taxes. Usually, the lower your taxable income, the less you'll owe in taxes, and the less you owe in taxes, the greater the refund. Cha-Chiiiing!!
Make sure you make your IRA contribution by the deadline and know your limits. The IRS puts a maximum amount that can be contributed each year. I can't stress this enough, consult an accountant or tax professional to make sure your IRA contributions are made on time and in the right dollar amount.
7) Refinance Your Home
If you are a home owner refinancing your mortgage can be extremely beneficial. Not only will it lower your mortgage payments and the total amount paid over the life of your loan but it can also give you some extra money on your tax return.
Here's how.... Most home loans, especially fixed rate loans, use what is called 'amortization.' Amortization is simply how your interest and principal are applied every time you make a mortgage payment. With a fixed rate loan, you are paying a fixed amount each month for the length of the loan. This payment is "Amortized" and divided between your principal balance (the actual amount of the loan) and the interest your bank charges to lend you the money.
To make sure the bank receives most of its interest payments upfront, in the first years, most of your monthly payment is being applied towards the interest, with a small amount going towards your principal. Each month, the equation tips just a little bit the other way and by the end of the mortgage, you are paying far more toward the principal than toward the interest.
When you refinance, this equation resets itself making the majority of your monthly payment mostly interest. The trick is that as it relates to your income tax, principal isn't deductible, but guess what...interest is, so refinancing will give you larger tax deduction from the higher interest payments which equals....... you guessed it..... A larger tax refund!! Cha-Chiiing! Cha-Chiiing! Cha-Chiiing!!
8) Check for New Tax Laws
Whenever there's any changes in the tax laws it can sometimes bring with it some tax deductions. The key is knowing what they are and whether you qualify. For example there's a recent tax law change that can put thousands of dollars in your pocket if you recently bought a house, remodelled or incorporated any energy-saving improvements. You can also get deductions for your vehicle if you purchase certain types of hybrid cars. In order to know which tax laws have changed you can either use tax software like H&R Block or Turbotax which has updates on the tax laws yearly or you can hire a tax accountant. Given all the recent tax trouble people have been getting into I would suggest the latter.
9) Start a Home Business
We now live in a time where starting a business is not only easier but can be done with low overhead resulting in showing a profit early. With many people now, taking the leap of faith and becoming their own bosses it would behoove you to take advantage of its many benefits. Starting a home-based business can increase your tax refund first with your initial investment into the business and secondly you can deduct things like your home office, telephone, Internet service and office supplies. The deductions aren't anything to sneeze at either; on average a home-business can bring in around $3,000 to $9,000 in tax savings. The great thing is that it doesn't matter whether you run your business full-time or if you still have a 9-5; you can still benefit by running a home-business.
10) Next time Start Early
Lastly, it is important to start early. Trying to scramble last minute to figure out what deductions you can take advantage of may have you leaving money on the table. However being proactive can be very beneficial. You should start at the very beginning of the year anticipating what deductions you want to take advantage of; speak to your accountant early to come up with a game plan.
If you follow any of these 10 steps you will surely increase the amount of money you receive in your tax return. Don't just let it go to waste make sure you are making the best choices and investing in things that can help your money grow. And if you are feeling generous you can also make a check payable to Ash Cash Enterprises, LLC (but I'm not sure if you'll get a tax deduction! Lol! j/k).
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Ash’Cash is a Business Consultant, Motivational Speaker, Financial Expert and the author of Mind Right, Money Right: 10 Laws of Financial Freedom. For more information, please visit his website, www.IamAshCash.com.