Easily Overlooked Ways to Increase Tax Refunds

The secret for how to get more back on taxes may be hiding in plain sight. Distilled to the simplest explanation, if you reduce the amount of your taxable income, you’ll also reduce the amount of taxes you owe. But this is a clear example of something that is easier said than done because of the complexity of federal tax laws, including exceptions to the laws and ongoing updates. Although tax professionals are equipped to cover the minutia of complicated tax return details, there are many easily overlooked ways for average taxpayers to increase their refunds.

Tip

You’ll owe less in taxes and realize your biggest tax refund by taking advantage of as many IRS tax write-offs as possible to reduce your tax liability.

How Tax Refunds Work

The IRS catchphrase of “pay as you go so you won’t owe” is an astute description of the federal income tax system. This pay-as-you-go method doesn’t make you wait until the end of the year to pay the full tax bill that you owe. You’ll make small, periodic tax payments throughout the year to lessen the impact of making a large, single payment at once. If you work for an employer, or if you receive other types of income (such as Social Security), you’ll pay income tax through the amounts that are withheld from the paychecks you receive. If you’re self-employed, you’ll pay income tax through quarterly estimated tax payments. When you file your tax return, any amount that you overpaid through withholding or estimated payments is returned to you as a tax refund. And it's the amount of this refund that you may be able to increase by taking full advantage of all the IRS deductions, credits and other benefits available to you.

Choosing to Itemize

Eligible taxpayers have the option of taking a standard deduction or itemizing their deductions when they file their taxes. If you itemize, each deduction you claim lowers your taxable income, which translates to less tax you’ll owe. The amount of the standard deduction depends on your age, income and filing status. It also adjusts from time to time, depending on changing legislation. For example, prior to the Tax Cuts and Jobs Act, married taxpayers filing jointly had a $12,700 standard deduction. But when the tax bill was signed into law, this amount increased to $24,000. For single taxpayers or those who are married filing separately, the 2018 standard deduction is $12,000. And taxpayers who file as head of household can claim a standard deduction of $18,000.

You may find that it's worth your while to itemize your deductions, even with 2018’s higher standard deductions. And if you’re not eligible to claim the standard deduction – many taxpayers aren’t – you can still itemize deductions on your tax return to adjust your taxable income downward. Examples of taxpayers who aren’t eligible to claim the standard deduction include trusts, estates, partnerships and married persons who file separately with spouses who itemize deductions.

To maximize a tax return refund, itemize your deductions instead of taking the standard deduction in two instances: if you’re ineligible to take the standard deduction or if the amount of all your itemized deductions is greater than the standard deduction.

Weighing Your Filing Status

Before you even start your treasure hunt to search for available tax write-offs, there is another way to increase your tax refund. Your filing status is a key component for determining how much tax you owe. The IRS lists five filing statuses: single, married filing jointly, married filing separately, head of household and qualifying widow(er) with dependent child. You may only fit into one of these categories, but many taxpayers qualify for more than one. For example, if you’re married, you can choose to file a joint return with your spouse or a separate return. Or you may be single but you financially support others, such as your parents, so you have the option of filing as single or head of household. Whenever you qualify for more than one filing status, filing under the one that gives you the highest tax benefit will result in lower taxes and net you your biggest tax refund.

Itemizing Tax Deductions

IRS Publication 529 (Miscellaneous Deductions) includes an in-depth list of allowable deductions that you can use to lower your taxable income. Although the amount of some of these deductions may be small, when you add all your allowable deductions together, you may be surprised at the total amount. Some of the easily overlooked deductions that may have significant dollar amounts include medical expenses, charitable contributions, home mortgage interest and business use of your home.

  • Medical expenses. IRS Topic 502 (Medical and Dental Expenses) covers eligible and ineligible medical expenses for deduction purposes. You can find this publication by visiting IRS.gov and searching for “Topic 502.” You’ll only be able to claim eligible medical expenses that are more than 7.5 percent of your adjusted gross income, and you’ll have to deduct any reimbursed expenses from your total medical expenses. Among the many allowable deductions are payments for psychological care, acupuncture treatments, inpatient alcohol or drug treatment programs and some medical-related insurance premiums. You can even deduct payments you make for prescription eyeglasses and contact lenses, hearing aids and false teeth.
  • Charitable contributions. You may be surprised at the list of charitable contributions the IRS allows you to deduct. IRS Publication 526 (Charitable Contributions) covers different types of contributions that are allowable as well as organizations that qualify for these deductions. Well-known organizations include the American Red Cross, United Way, Girl Scouts of America and churches, synagogues and other religious organizations. But lesser-known charitable deductions include your local government (for example, if you make a donation to improve a city park or school), nonprofit hospitals or schools and war veterans’ groups. Your contribution must include no benefit to you; for example, if you pay $50 to attend a fundraiser dinner at your church, you can only deduct the portion of the contribution that was greater than the fair market value of the actual meal.
  • Home mortgage interest. If you own your home and your mortgage debt is $750,000 or less, you can deduct the interest you pay on your mortgage loan each year if your home secures the debt. You can also deduct the interest on a second mortgage, home equity loan or home equity line of credit if you use these funds to buy, build or significantly improve the home (if the home secures the debt). And you won’t have to choose one over the other (mortgage loan over home equity loan, for example). As long as the total debt does not exceed $750,000, you'll be able to deduct all the interest you pay on qualifying home-related loans. 
  • Business use of your home. According to the U.S. Bureau of Labor Statistics, a surprising 22 percent of workers conduct some or all of their business from home. The IRS recognizes the costs of upkeep, depreciation and other associated costs that telecommuters and self-employed workers incur by allowing numerous tax deductions for these homeowners. You’ll first have to meet some requirements before you can claim business deductions for your home such as using part of your home exclusively for business purposes, including inventory storage. IRS Publication 587 (Business Use of Your Home) details these requirements and lists allowable deductions, which include the costs of utilities, repairs and insurance. 

Claiming Tax Credits

Tax credits typically are deducted from the amount of taxes you owe, which reduces your overall tax burden. But some tax credits may be refundable, even if you don’t owe any taxes. So even though a refundable tax credit isn’t a refund of tax you overpaid, it’s additional money you can claim if you meet eligibility requirements.

As the name of the earned income tax credit implies, you must have earned income, such as wages, instead of unearned income, such as retirement pay, to qualify for this tax credit. One exception is investment income, which you can include in your total income in an amount up to $3,500. The IRS determines the amount of credit you receive based on your income, your filing status and the number of qualifying children you claim. And if you're married, you'll have to file a joint return with your spouse to receive the earned income tax credit.

If you're filing single, head of household or widowed, your adjusted gross income and your earned income amounts for the 2018 tax year must each be less than $15,270 (if you claim no children), $40,320 (if you claim one child), $45,802 (if you claim two children) or $49,194 (if you claim three or more children). If you're married filing jointly, your adjusted gross income and earned income amounts must each be less than $20,950 (if you claim no children), $46,010 (if you claim one child), $51,492 (if you claim two children) or $54,884 (if you claim three or more children).

The IRS places a cap on the amount of earned income tax credit you can receive: $519 (if you claim no children), $3,461 (if you claim one child), $5,716 (if you claim two children) and $6,431 (if you claim three or more children).

Beginning with the 2018 tax year, you can take a child tax credit up to $2,000 for each of your qualifying children younger than 17 years of age. The exact amount of your child tax credit is based on your earned income such as wages, salaries and tips. No unearned income is allowed to be eligible for this credit. If you qualify for the $2,000 credit, simply subtract this amount from your tax burden. But if you don't owe any taxes, you can receive up to $1,400 as a refundable tax credit. If you qualify for a refund, multiply the amount of your earned income that exceeds $2,500 by 15 percent. For example, if your earned income is $10,000, subtract $2,500 and multiply this amount by 15 percent ($10,000 - $2,500 * 15 percent = $1,125). Because the maximum refundable credit you can receive is $1,400, you'll receive the full $1,125 refund in this scenario.

Understanding the Term Qualifying Child

You'll see the term qualifying child in IRS descriptions of eligible dependents and requirements for certain tax credits. Before you can take these credits, you'll first have to make sure your child qualifies as your dependent, and you also must have a Social Security number for your child. The IRS lists specific requirements that your child must meet to be your qualifying child, including: the child's relationship to you, the child's age, the child's residency and the financial support you provide. And even though a child may be a qualifying child for more than one person (or a married couple), only one person or couple may claim the child. In the event of more than one possibility, the IRS provides tiebreaker rules to determine the legal status of the child's dependency. Visit IRS.gov and search for "qualifying child rules" to read the guidelines, exceptions and tiebreaker rules.

Filing Your Tax Return

If you itemize your deductions and claim tax credits, you'll have to file IRS Form 1040, 1040-A or 1040-NR. The 1040-EZ short form won't work for itemizing. But beginning in 2019, you'll be able to take advantage of the new IRS 1040 form. This form will incorporate the current 1040, 1040-A and 1040-EZ series into one streamlined form.

About the Author

Victoria Lee Blackstone was formerly with Freddie Mac’s mortgage acquisition department, where she funded multi-million-dollar loan pools for primary lending institutions, worked on a mortgage fraud task force, and wrote the convertible ARM section of the company’s policies and procedures manual. Blackstone is also a horticulturist and a professional writer (www.VictoriaLee.me) who has authored research-based scientific/technical papers, horticultural articles, and magazine and newspaper columns.


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