Sunday, January 20, 2013

5 Hidden Ways to Boost Your Tax Refund


FROM TURBOTAX.COM -

While Americans may disagree on how their taxes are spent, at tax time, most of us are looking for ways to pay no more than we owe, or even boost our tax refunds. These five strategies go beyond the obvious to give you tried-and-true ways to reduce your tax liability.

Rethink filing status to boost your refund

One of the first decisions you make when completing your tax return, your filing status, can affect your refund's size, especially if you're married. While most married couples file jointly -- 96 percent did in 2009 -- a joint return is not always the most beneficial way to boost your refund. Married-filing-separately status requires more effort, but the time you invest offers tax savings under the right circumstances. Calculating your taxes both ways will point you in the higher refund direction. (When you use TurboTax, we’ll do this calculation for you and recommend the best filing status.)
The IRS uses a percentage of adjusted gross income -- AGI -- to determine whether some deductions can be used such as medical and certain miscellaneous expenses. Filing separately gives each spouse a lower AGI. If one of them has a lot of medical expenses, such as COBRA payments resulting from a job loss, computing taxes individually allows that spouse to reach the needed AGI percentage based on her own income.
Or, a spouse who spends a lot of time on the road and in the air might have travel expenses such as baggage fees that merit separate filing. Expenses can add up for an unemployed spouse looking for work -- long distance calls, resume preparation, career counseling and networking -- and could be a sleeping miscellaneous deduction that reduces taxable income. However, choosing to file individual returns has drawbacks, such as losing credits available to joint filers, that you must weigh to maximize your refund potential.
Tax reductions from claiming dependents can cut a single parent's tax bill when he files as head of household. You need to have one or more children who lived with you for more than six months, and paid more than 50 percent of the cost of keeping a home. Those costs include mortgage and rent, utilities, homeowner's or renter's insurance, repairs and food.
Single taxpayers who care for a parent may also qualify for the more advantageous head-of-household status if they paid more than half of that parent's main residence for the whole year. Your parent need not live with you; when you pay more than half of their cost to live in a home for seniors or rest home, you can claim head of household.

Don't shy away from tax deductions

Keeping a trip log for your volunteer work, job-hunting and doctor's appointments may seem like a waste of time, but those miles add up and represent deductions. Parking, toll and bus or taxi receipts support your claim, while a record of the miles you drove lets you write off the cost of using your car through the standard mileage rate. Good travel records could help you reach the needed minimum percentage of adjusted gross income for miscellaneous deductions.
Moving for a new job 50 miles or more away can boost your tax refund because you can deduct moving, storage and travel expenses related to your relocation. You have to work full time at the new job for at least 39 weeks the first year; however, you can take the deduction in the year you move if you expect to meet this time test within the following tax year. You don't have to itemize to get this tax break to lower your adjusted gross income. Simply figure your total using Form 3903 and attach it to your 1040 return.
Charitable deductions can help your refund cause, too. Record keeping lets you add up the dollars spent doing charity work, in addition to claiming the market value of any clothing or household things you donate. When you bake for a fund-raiser, the cost of your ingredients can be deducted, but not the value of the time you spent baking.

Maximize your IRA contributions

You have until April 15 to open a traditional IRA for the previous tax year. That gives you the flexibility of claiming the credit on your return, filing early and using your refund to open the account. Traditional IRA contributions reduce your taxable income. You can take advantage of the maximum contribution and, if you're at least 50 years old, the catch-up provision, to add to your IRA. If you contributed to a Roth IRA, you may be able to claim the retirement savings contribution credit that also lowers taxable income and result in a larger refund check.

Timing can boost your tax refund

Taxpayers who watch the calendar improve their chances of getting a larger refund. If you can, pay January's mortgage payment before December 31 and get the added interest for your mortgage interest deduction.
Schedule health-related treatments and exams in the last quarter of the year to boost your medical expense deduction potential.
Paying property taxes by New Year's Eve could make the difference between itemizing and taking the standard deduction, and thus, a bigger refund. If you're self-employed, you can pay your fourth-quarter state estimated taxes in December, rather than in January when they're normally due, to increase your itemizing potential.

Become credit savvy and refund happy

Credits work better than deductions as refund boosters. For each credit dollar, your taxes go down a dollar. Yet, 20 percent of eligible Americans don't claim the earned income tax credit. If you're working and meet the guidelines, you may be eligible for EITC even if you're single with no children. If you have kids, the child-care credit may help you.
For those with children in college, credits related to higher education expenses, such as the American Opportunity Tax Credit, could provide tax relief. “The American Opportunity Credit is great because up to $1,000 is refundable. That means you could receive as much as $1,000 even if you had no tax liability. "The total credit is $2,500 and applies only to the first four years of undergraduate higher education expenses. If you're in grad school or beyond, you may be eligible for the Lifetime Learning Credit."
Tax laws change frequently, and credits come and go, so staying informed can be financially rewarding. Credits for home improvements that save energy keep more money in your wallet throughout the year and at tax time. For example, an investment in an alternative energy heating system for your home could let you claim 30 percent of the cost through 2016. By keeping up with tax changes, you can plan how they might affect your cash flow.